Earnings Per Share Flashcards
Basic Earnings per share formula
Eps = profit after tax and preference dividends / weighted average number of ordinary shares
What will give rise to adjustments ?
A) bonus issues
B)new shares at full market price
C) rights issues
How are bonus shares treated by IAS 33
Requires that if there is a bonus issue of shares during an accounting period that the bonus issue should be treated as if it had occurred at the Beginning of the earliest period for which eps is presented
How to deal with bonus shares
Step 1 = calculate the profit on ordinary activities after taxation and preference dividend
Step 2 = calculate the number of ordinary shares adjusted for the bonus issue
Step 3 = calculate eps
New shares at full market value
Does not always cause a dilution
Will raise finance for the company however timing is crucial as if a company has a 31 dec year end and raises extra finance on 1 January it would be expected that this would enhance earnings more than if it were raised on 30 nov
So it is not enough to just look at the year end number of shares.
New market shares formula ?
Months without new shares x number of original shares
+
Months with new shares (6/12 =0.5 etc) x total shares
Eps = profit and pref div/ weighted avg of shares
Rights issue
A company issue it extra shares to existing shareholders in proportion to their existing shares if issued at full market price they are treated like new market shares
If issued at a discounted price need to calculate theoretical ex rights price and the bonus element and the weighted avg
Theoretical ex rights price formula ?
Total value/ total number of shares = value per share
Formula for diluted earnings per share
Calculate adjusted shares if everyone exercises their options
Price earnings ratio formula ?
Market price of share/ earnings per share
