Earnings Per Share

Question 1

What accounting standard deals with earnings per share

Answer 1

IAS 33 Earnings per share

Question 2

do any of the other ratios have their own financial standards

Answer 2

no

Question 3

what is the scope of IAS 33 Earnings per share

Answer 3

listed companies (Plcs)

Private companies can if they want

Question 4

why is the EPS an important ratio

Answer 4

feeds into Price Earnings ratio, indicator of market sentiment

Question 5

when a group must disclose their EPS, do they disclose for just the parent or the group as a whole

Answer 5

group as a whole

Question 6

where is the earnings per share disclosed

Answer 6

on the income statement

up front and on the face of the financial statements

Question 7

how to calculate basic EPS

Answer 7

net profit or loss for the period attributable to ordinary shareholders / weighted average no. of ordinary shares outstanding in the period

Question 8

what does net profit/loss attributable to ordinary shareholders mean

Answer 8

profit or loss after tax and after preference dividends

Question 9

why are the number of shares for calculating basic EPS time weighted

Answer 9

so shares issued at beginning, middle and end of the year are treated different

Question 10

how to calculate the weighted average number of shares outstanding in the period for basic EPS calculation

Answer 10

shares at beginning of year

+

(shares issued during the year * time weighting factor)

-

(shares bought back during the year * time weighting factor)

Question 11

how will bonus issues effect EPS

Answer 11

will increase the number of shares, but not the profit

Question 12

what are bonus issues

Answer 12

free extra shares to existing shareholders, depending on how many they own, in proportion to existing shareholding

Question 13

does the shareholders proportion of shares held change after the bonus issue

Answer 13

no

Question 14

are bonus shares time weighted

Answer 14

no

always deemed to have occurred at the start of the year

must back date to the earliest period presented in the financial statements

Question 15

why for bonus issues do you back date until the earliest date in the financial statements?

Answer 15

for comparability

Question 16

what is the previous years EPS adjusted for comparability purposed called

Answer 16

restated eps

Question 17

what is a rights issue

Answer 17

offer to existing shareholders to buy more shares at a price less than market value in proportion to existing shareholding

Question 18

is market value of shares expected to rise or fall after rights issue

Answer 18

fall, as you are giving away something for less than its value

Question 19

what are the three steps for calculating EPS with a rights issue

Answer 19

1. calculate the theoretical fall in the market value of shares in the short term caused by the rights issue
2. compute the bonus size that would have caused the same market price fall
3. treat the remainder of the rights issues as an issue at full market price

Question 20

how do you calculate the size of the bonus issue that would have caused the same market price fall

Answer 20

no of shares before rights issue

*

(market value before rights issue/theoretical market value after rights issue) -1

Question 21

what is diluted EPS

Answer 21

EPS that includes all potential future shares, out of prudency

Question 22

examples of cases where shares might be issued in the future

Answer 22

convertible bonds and options

Question 23

what is the negative affect of all of the potential shares being converted

Answer 23

dilutive effect on EPS

Question 24

what is the positive affect of all of the potential shares being converted

Answer 24

no interest needs to be paid on convertible bonds and options anymore

Question 25

what does it mean if potential ordinary shares are dilutive

Answer 25

they decrease EPS

Question 26

what does it mean if potential ordinary shares are antidilutive

Answer 26

they increase EPS

Question 27

what are some problems with placing too much emphasis on EPS

Answer 27

1. just tells us about earnings and equity, tells us nothing about debt, too much debt is risky
2. EPS can be manipulated in the short term e.g. staff cuts, cutting expenses, selling more on credit
3. Can change EPS with share buybacks.

Would prefer for the company to make longterm investments to improve EPS

Question 28

if there are multiple conversion dates and scenarios in a question, which should be selected

Answer 28

the one that results in the most new equity being issued and will hurt equity the most