EPS Flashcards
what is the scope of IAS 33?
it applies to companies whose ordinary shares are publicly traded.
what figures are public companies who present both parent and consolidated financial statements supposed to use for their EPS?
the consolidated figures…
what is the formula for basic EPS?
uper profit neeche shares.
earnings / shares
how do we arrive at the earnings figure used in EPS?
earnings: profit attributable to ord Sh
which is
profit less tax, less non controlling interest, less irredeemable preference share dividends.
why is EPS widely regarded as most important indicator of a company’s performance?
share price is dependent on EPS. the higher the EPS the higher the share price. thats why EPS is SH k dilon ki dharkan.
1- EPS is used to calculate the Price earnings ratio. which is MP of share/ EPS. its a major stock market indicator of performance.
2- trend in EPS helps measure performance for SH.
how many decimal places to express EPS in
1 decimal place
how to calculate EPS when there is full MP issue during the year?
we calculate Weighted average number of shares.
logic: cuz new resources are coming into the business.
bonus issue doesnt increase wealth of SH, explain how
before bonus issue EPS: 10/share
MP= 20/ share
Mr X owns 10 shares. his wealth: 200.
after bonus issue: EPS= $5/share.
MP= 10/share
Mr X wealth. same
other names for bonus issue?
scrip issue/ capitalization issue
why might a company issue bonus shares? and how to calculate EPS when there is a bonus issue?
it might if its having liquidity problems. thus paying dividend in form of shares.
eps is calculated by calculating Bonus fraction. and bonus shares are adjusted at the start of the year.
how to calculate EPS when there is a rights issue?
1- adjust bonus element by bonus adjustment factpr (BAF)
BAF is calculated as:
market price before issue/ TERPS
2- Weighted avg number of shares
how to restate EPS?
multiply last year EPS with reciprocal of bonus fraction. or BAF. or both if both apply.
what is DEPS?
diluted EPS. its an application of prudence concept. its a what if scenario in which we include POteNtial SHARES.
what are examples of things which can dilute EPS?
1- convertible loan notes
2- share options/ warrants
how is DEPS calculated?
Earnings + incremental after tax savings/ shares + new potential shares.
how do we deal with convertible loan notes/ convertible preference shares?
1- calculate increase in # of shares
2- interest per annum will be saved.
3- tax will have to be paid on interest saved.
4- so calculate incremental after tax savings by lessing tax from interest.
how do we calculate DEPS when there are options and warrants to subscribe for shares?
we will calculate the number of free shares to be issued with the following formula:
no of options x (fair value - exercise price / fair value)
we will just include free shares in calculation of DEPS.
what do we do when convertible loan notes are issued during the year?
we will take impact of both: free shares and incremental after tax savings in the period after loan notes were issued.
what do we do in case of multiple conversion options?
go for worst case scenario
what is the importance of DEPS
1- shows what if scenario if potential shares had been converted
2- can be used to assess trends in past performance
3- warns SH if their investment will fall
what are the limitations of EPS?
-historical figure, doesnt have predictive value necessarily
- DEPS is also only an additional measure of PAST performance DESPITE looking at future potential shares
-companies have diff accounting policies so might not be appropriate to compare diff companies EPS
-earnings figure is subjective to judgement eg. prov in doubtful debt
-EPS may increase in inflation so growth in earnings may not be real
-earnings should never be used as a single key performance measure its far too simplistic an approach to PM
-cant use EPS to compare companies. cuz some have more shares in issue some less
-when new shares are issued during the year, we calculated WA#S cuz we say earnings will increase cuz new resources in business.
normally profits arent generated foran and EPS falls after issue of new shares sooo. not accurate.
what happens when in DEPS, the earnings increase is less, proportionately, than the increase in the shares in issue?
the effect is called “ dilution” and the shares to be issued are called “dilutive potential ordinary shares”
how to calculate TERPS
old shares * MP + new shares*issue price/total shares
