Earnings per share

Question 1

What are earnings per share?

Answer 1

is the portion of a company’s profit allocated to each share.
serves as an indicator of a company’s profitability.
applies to ALL entities whose ordinary shares or potential ordinary shares are publicly traded.

Question 2

What is the basic calculation for earnings per share?

Answer 2

= (Net Profit/Loss attributable to Ordinary Shareholders)/
(Weighted Average no. of shares o/s during the period)

Question 3

What happens when new capital is introduced?

Answer 3

New capital is introduced so earnings expected to rise from date of new issue.
proceeds from issue used to invest in new assets or pay off debt.
to calculate the number of shares:
Use time weighted average number of shares for period
No retrospective effect

Question 4

What is a bonus issue?

Answer 4

shares issued for nil proceeds.
reduces EPS.
Earnings of company will not rise (no new funds injected); to calculate the number of shares.
Treat bonus shares as if in issue for full year.
Apply retrospectively: reducing the reported EPS for the previous year by the reciprocal of the bonus fraction

Question 5

What happens to EPS calculation after bonus issue?

Answer 5

EPS calculation becomes:

Earnings/(Share number before bonus x bonus fraction)

Bonus fraction= Shares after bonus issue/ Shares before bonus issue

Question 6

What is the bonus fraction?

Answer 6

Shares after bonus issue/ Shares before bonus issue

Question 7

Company B holds 100,000 shares and makes a 1 for 10 bonus issue
100,000/10 = 10,000 new shares issued

What is the bonus fraction?

Answer 7

110,000 / 100,000
11/10

Question 8

What happens to shares not issued at their full market price?

Answer 8

two steps in determining weighted average capital
Step 1: adjust for bonus element- multiply capital before rights issue by bonus element.
Bonus element:
Actual cum – rights price
theoretical ex – rights price
Step 2: calculate the weighted average capital in the issue on a time apportioned basis.

Question 9

What is the TERP Equation?

Answer 9

((N*Cum-rights price)+issue price) / N+1

Question 10

How to calculate the value of a right?

Answer 10

(TERP - Issue price)/ n

N = number of shares required to be held in order to receive one rights issued share (eg: 1 for 4 rights issue, n=4)