Earnings per share EPS (IAS 33)

Question 1

What is earnings per share?

Answer 1

EPS is a key investor ratio which can be used as a predictor of future dividends, to compare companies.

Question 2

What else does EPS calculation involve in?

Answer 2

EPS is also a component of the P/E (price-earnings) ratio and price-earnings to growth ratio

Question 3

What does a high price/earnings ratio tell you

Answer 3

It tells the investors high confidence of the markets in that entity

Question 4

How does IAS 33 interact with the conceptual framework?

Answer 4

IAS 33 increases the reliability of the EPS measurement.

It aims to reduce manipulation and increase consistency and comparability by specifying how entities must determine both profit and number of shares components of the EPS ratio.

Question 5

What is the earnings per share formula?

Answer 5

EPS= (Profit after tax-preference dividends)/weighted average number of ordinary shares

Question 6

How to work out the weighted average of shares?

Answer 6

e.g. 4000k shares by reporting period (31st dec), 1000k of it was issued (on 1st oct).

(1st Oct-31st Dec: 4000k x 3/12) + (1st jan-30th sept:3000k x9/12) = 3250k Weighted average of shares

Question 7

When are shares issued below market price?

Answer 7

Shares are issued below market price when:

shares are issued for free(no cash) as part of a bonus issue to existing shareholders

Shares are issued at a discount as part of a rights issue to existing shareholders.

Question 8

How do we treat a Bonus issue?

Answer 8

Treat the shares issued as if the bonus issue occurred at the start of the period. Can be done using bonus fraction: (always top heavy)

e.g. if we have a 2 for 5 bonus the bonus fraction is 7/5

Question 9

How do we treat a rights issue? (equation)

Answer 9

Treat as a mix of an issue at full price and a bonus issue using a fraction:

Market value/Theoretical ex-rights price

Theoretical ex-rights price =
(MV of shares before rights issue+proceeds from rights issue)/ total shares (including rights issue).

Question 10

Diluted Earnings per share, what is the point of it?

Answer 10

It is to inform a ‘worst case scenario’ for current ordinary shareholders. A hypothetical measure

Question 11

Diluted EPS is reported in addition to the basic EPS when the entity has potential ordinary shares such as….

Answer 11

Convertible debt (loans)

Share options

Question 12

What are convertible debt (loans)

Answer 12

Loans that are repaid either by cash or by issuing ordinary shares according to what the lender prefers.

Question 13

How to calculate diluted EPS when we have convertible loans?

Answer 13

We pretend that the convertible loan had converted into shares at the start of the current period, and add to basic EPS.

Question 14

Implication on profit after tax and weighted number of shares if convertible loans are converted to ordinary shares?

Answer 14

Earnings (profit after tax) would increase (as no further interest is paid).

Weighted number of shares would increase (as more shares issued).

Question 15

Is diluted EPS real?

Answer 15

No it is a hypothetical measure of the worst case scenario for a current shareholder.

Question 16

Diluted EPS:

Implication on profit after tax and weighted number of shares if share options exists?

Answer 16

Share option do no impact profit after tax (as dividends are paid out of retained profits). –> thus no adjustment for profit figure in EPS.

SHare options could give rise to an increase in shares in the future so we adjust the weighted average number of shares for the dilutive impact.

Question 17

How to calculate diluted EPS when we have share options?

Answer 17

1. calculate the cash raised from share options
2. how many shares would this cash purchase at MV?
3. Compare (2) to the shares that would be issued under option: difference is added to the weighted average shares used for basic EPS to reflect dilutive impact of the options.

Question 18

explain why bonus issues are treated in the way they are in IAS 33?

How about when there are comparative years?

Answer 18

Bonus issues are given at no consideration, this means no increase in resources associated. Ceteris paribus, no increase can be expected with a bonus issue, this can be explained by the fact that same amount of earnings is divided by a larger amount of shares.

For comparison, shares of comparative years presented must be adjusted to the extra bonus shares for a fair comparison of the years.