Earnings per share

Question 1

What are the earnings per a share?

Answer 1

• is widely regarded as the most important indicator of a company’s performance

Question 2

How IAS 33Earnings per Share can achieve comparability by?

Answer 2

-defining earnings
- prescribing methods for determining the number of shares to be included in the calculation of EPS
- requiring standard presentation and disclosures

Question 3

Basic calculation of Earnings per Share

Answer 3

Earnings / Shares

Question 4

What are the earnings?

Answer 4

• group profit after tax, less non-controlling interests and irredeemable preference share dividends

Question 5

What are the shares?

Answer 5

• weighted average number of ordinary shares in issue during the period

Question 6

4 steps with rights issue to calculating EPS

Answer 6

1. Calculate theoretical ex-rights price (TERP)
2. Bonus fraction
3. Weighted average number of shares
4. Earnings per share (EPS)

Question 7

Calculation theoretical ex-rights price (TERP)

Answer 7

Start with the number of shares previously held by an individual at their market price. Then add in the number of new shares purchased at the rights price. You can then find the TERP by dividing the total value of these shares by the number held

Question 8

Bonus fraction

Answer 8

Market price before issue divided Theoretical ex rights price

Question 9

Weighted average number of shares

Answer 9

Draw up the usual table to calculate the weighted average number of shares. When doing this, the bonus fraction would be applied from the start of the year up to the date of the rights issue, but not afterwards

Question 10

Earnings per share (EPS)

Answer 10

Profit after tax divided by Weighted average number of shares

Question 11

Diluted earnings per share (DEPS) when it occurs

Answer 11

• this increase in shares will reduce, or dilute, the earnings per share. The provision of a diluted EPS figure attempts to alert shareholders to the potential impact on EPS of these additional shares.

Question 12

Examples of dilutive factors are:

Answer 12

• the conversion terms for convertible bonds/convertible loans
• the exercise price for options and the subscription price for warrants

Question 13

Calculation of DEPS (Diluted earnings per share

Answer 13

Earnings + notional extra earnings divided by
Number of shares + notional extra shares

Question 14

What if the convertible bonds/preference shares had been converted:

Answer 14

• the interest/dividend would be saved therefore earnings would be higher
• the additional earnings would be subject to tax
• the number of shares would increase

Question 15

What gives an option or warrant?

Answer 15

• gives the holder the right to buy shares at some time in the future at a predetermined price
• cash is received by the entity at the time the option is exercised, and the DEPS calculation must allow for this.

Question 16

What is the split into two when the total number of shares issued on the exercise of the option or warrant?

Answer 16

• the number or shares that would have been issued if the cash received had been used to buy shares at fair value
• the remainder, which are treated like a bonus issue

Question 17

Calculation of the DEPS with an option

Answer 17

Number of options multiply by
Fair value minus exercise price
divided by fair value

Question 18

What is the EPS figure to used to?

Answer 18

• used to compute the major stock market indicator of performance, the price earnings ratio (P/E ratio)

Question 19

P/E ratio calculation

Answer 19

Market value of shares divided by EPS

Question 20

Reasons of importance of DEPS

Answer 20

• it shows what the current year’s EPS would be if all the dilutive potential ordinary shares in issue had been converted
• it can be used to assess trends in past performance
• in theory, it serves as a warning to equity shareholders that the return on their investment may fall in future periods.