EPS

Question 1

what is the scope of IAS 33?

Answer 1

it applies to companies whose ordinary shares are publicly traded.

Question 2

what figures are public companies who present both parent and consolidated financial statements supposed to use for their EPS?

Answer 2

the consolidated figures…

Question 3

what is the formula for basic EPS?

Answer 3

uper profit neeche shares.
earnings / shares

Question 4

how do we arrive at the earnings figure used in EPS?

Answer 4

earnings: profit attributable to ord Sh
which is
profit less tax, less non controlling interest, less irredeemable preference share dividends.

Question 5

why is EPS widely regarded as most important indicator of a company’s performance?

Answer 5

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.

Question 6

how many decimal places to express EPS in

Answer 6

1 decimal place

Question 7

how to calculate EPS when there is full MP issue during the year?

Answer 7

we calculate Weighted average number of shares.
logic: cuz new resources are coming into the business.

Question 8

bonus issue doesnt increase wealth of SH, explain how

Answer 8

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

Question 9

other names for bonus issue?

Answer 9

scrip issue/ capitalization issue

Question 10

why might a company issue bonus shares? and how to calculate EPS when there is a bonus issue?

Answer 10

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.

Question 11

how to calculate EPS when there is a rights issue?

Answer 11

1- adjust bonus element by bonus adjustment factpr (BAF)
BAF is calculated as:
market price before issue/ TERPS
2- Weighted avg number of shares

Question 12

how to restate EPS?

Answer 12

multiply last year EPS with reciprocal of bonus fraction. or BAF. or both if both apply.

Question 13

what is DEPS?

Answer 13

diluted EPS. its an application of prudence concept. its a what if scenario in which we include POteNtial SHARES.

Question 14

what are examples of things which can dilute EPS?

Answer 14

1- convertible loan notes
2- share options/ warrants

Question 15

how is DEPS calculated?

Answer 15

Earnings + incremental after tax savings/ shares + new potential shares.

Question 16

how do we deal with convertible loan notes/ convertible preference shares?

Answer 16

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.

Question 17

how do we calculate DEPS when there are options and warrants to subscribe for shares?

Answer 17

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.

Question 18

what do we do when convertible loan notes are issued during the year?

Answer 18

we will take impact of both: free shares and incremental after tax savings in the period after loan notes were issued.

Question 19

what do we do in case of multiple conversion options?

Answer 19

go for worst case scenario

Question 20

what is the importance of DEPS

Answer 20

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

Question 21

what are the limitations of EPS?

Answer 21

-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.

Question 22

what happens when in DEPS, the earnings increase is less, proportionately, than the increase in the shares in issue?

Answer 22

the effect is called “ dilution” and the shares to be issued are called “dilutive potential ordinary shares”

Question 23

how to calculate TERPS

Answer 23

old shares * MP + new shares*issue price/total shares