Earnings per share

Question 1

Disclosure requirement

Answer 1

EPS disclosure requirement for all companies with shares that are publicly traded. Disclosed in P&L.

Either basic EPS or diluted EPS

Question 2

Define

Earnings
No. of shares
Theoretical ex-rights price (TERP)

&

EPS formula

Answer 2

Earnings = Profit or loss for the period attributable to the ordinary equity holders of the parent. After tax, NCI and preference dividends

No. of shares = The weighted average number of shares in issue

Theoretical ex-rights price (TERP) = The theoretical share price that would arise after a rights issues, if no other information was given to the market

EPS (in cents) = (Earnings / Weighted average no. of shares) x100

Question 3

Calculating weighted average no. of shares

Issue at full market price (FMP)
Bonus issue

Answer 3

Issue at full market price (FMP) = time apportion the number of shares (number of shares x months in issues over 12 + same again until full year)

Bonus issue = same as full market price but remember bonus issue if for 0 consideration but shares in issues increases (2 for 1 bonus issues takes issued 100 shares to 300). This will make the EPS look as if its deteriorated so adjust prior year figure by recalculating its EPS with bonus fraction

Bonus fraction = new no. of shares / old, then

Earnings / (no. of shares x bonus fraction)

Question 4

Calculating weighted average no. of shares

Rights issue

Answer 4

Rights issue = same as bonus issue however prior year EPS is calculated with bonus fraction = old share price / TERP.

TERP scenario - Rights issue 3 for 1. Shareprice before issue £8 and rights price £6.

3 shares x £8 = 24
1 share x £6 = 6
Total for 4 = 30
30/4 = 7.5 = TERP

Earnings / (shares x bonus fraction)

Question 5

Diluted EPS - meaning

Answer 5

Acts as a warning sign for investors as it shows what the EPS could become if all potential shares were issued, for example if a director cashed in their share options

Question 6

Diluted EPS re

Convertible loan stock

Answer 6

Pretend the loan stock doesn’t exist and that the shares have been issues instead

Interest expense to be added back to profits and shares added as if issued

Question 7

Diluted EPS re share options or warrants

4 steps

Answer 7

Pretend shares have been issued

1 - calculate cash receivable
2 - calculate the number of share that wold be issued if cash received had been used to buy shares at average price
3 - Deduct figure in step 2 from actual number of shares - this gives you number of shares issued
4 - add step 3 figure to average number of shares in the period for total shares in period and calculate EPS