Earnings per share

Question 1

What is Earnings per share?

Answer 1

Basically this is profit per year divided by the number of shares in issue.

Earnings - Profit after tax, preference share dividends and NCI’s share. This is also known as the profit available to ordinary shareholders.

No. of shares - This will be a weighted average of the number of ordinary shares in issue

Question 2

What is meant by a weighted average and how is this calculated?

Answer 2

Weighted average applies to Full market and rights issues of shares, Proforma is:

No. Shares, x fraction of year held, x bonus fraction, weighted average.

Question 3

What is a bonus issue fraction and why do we need it?

Answer 3

Bonus issue fraction is applied where a bonus issue occurs in a year and is applied to the number of shares in issue prior to the bonus issue. It is applied as bonus shares are assumed to be in issue for the full year.

Calculated as New number of shares/old number of shares.

Question 4

How does a bonus issue effect comparatives with the prior year.

Answer 4

Where there has been a bonus issue the prior year EPS will need to be adjusted in order to give a meaningful comparative:

Prior year EPS x inverse of bonus fraction = adjusted EPS.

Question 5

What is a rights issue bonus fraction (RIBF)?

Answer 5

This is applied where a rights issue has occurred in the year:

Actual market price per share/ Theoretical Ex rights price.

AMPPS = Value of shares/no. of shares before rights issue

TERP - Total new value of shares/no. of shares.

Question 6

What is diluted earnings per share?

Answer 6

DEPS is used to show the impact on EPS of future share issues that may arise as the result of instruments in issue at the year end. instruments are Convertible bonds and share options.

Question 7

How is the DEPS on convertible bonds calculated?

Answer 7

Bear in mind once a loan is converted the entity will no longer be paying interest and is is assumed that the maximum conversion of shares will occur.

1. Calculate basic EPS - this may be given in the question.
2. Adjust earnings - Saving of interest net of tax.
3. Adjust shares - should give the conversion No. in the question.
4. Earnings + Inc in Earnings/increased No. shares = DEPS.

Question 8

How is the DEPS on share options calculated?

Answer 8

Share options will have no impact on earnings, the no of shares will increase by the bonus element.

1. Identify no. of options in existence.
2. Bonus element - (market price-option price)/market price x no. shares option to buy.
3. DEPS = Earnings / (issued + bonus shares)