IAS 33 - Earnings Per Share

Question 1

IAS33 - Earnings Per Share.

Basic EPS.
Full price shares issue
Bonus Issue
Rights Issue

Answer 1

EPS presented as cents per share to 1d.p.

Basic EPS

• Earnings [w1] / Number of Ordinary shares
  
  • • w1 - Profit After Tax less Irredeemable preference dividend = Earnings available to ordinary shareholders.

Full Price Share Issue
- Will be required to time-apportion the shares based on when the new shared were issued, by finding the weighted average over the period.
- i.e. 1,000 * 3/12 (months of the year) = 250 W Avg
2,000 * 9/12 (New shares were issued) = 1,500 W Avg.
- Earnings / Weighted Average of Ordinary Shares = EPS

Question 2

EPs - Rights Issue and comparatives

Answer 2

CRS - Total Number of Cum Rights Shares

Rights Issue

• Cheaper shares to existing shareholders (below Market Value
• Bonus fraction calculated as Cum Rights Price / TERP
• Need to learn the table.

TERP
Before Rights Issue 4 x $2.00 (CRP) = $8.00
Rights Issued 1 x $1.90 (IP) = $1.90
5 x TERP = $9.90

TERP = 9.90/5 = 1.98

Date #CRS n/12 RIBF Weighted Average
date x,xxx [x] x/12 [x] CRP/TERP [=] x,xxx
date x,xxx [x] x/12 [=] x,xxx
WAV

Earnings / WAV = EPS

RIBF - Rights Issue bonus Fraction
WAV - Weighted Average

Comparatives

• Required to adjust the previous periods EPS so that it is comparable to the current number of shares.

Restate EPS comparative calculation

EPS x inverted RIBF

If RIBF was 1.15/1.02
the restated EPS would be EPS x 1.02/1.15

Question 3

EPS - Bonus Issue and comparatives

Answer 3

Bonus issue

• Free shares for existing shareholders.
• Are treated as if they were present from the start of the year using a bonus fraction
• Bonus Fraction
  
  • • Shares after issue / Shares before issue (i.e. 1 for 3 issue would = 4/3)
• Also need to consider the effect this has on comparing the EPS to previous periods. see Bonus Comparative.
• Weighted average table including bonus fraction, then adjust comparative for previous period.

Bonus Issue Comparative

• In order to ensure the EPS is comparable to previous periods after a bonus issue, we will need to adjust the comparative EPS.
• The calculation for this is to multiply the previous periods EPS by the inverse of the bonus fraction.
• The comparative will always be lower than the original figure.

Why issue bonus shares?

• A way of paying a dividend and appeasing shareholders when the company does not want to distribute cash.
• A way of reducing the share price in order to incentivise new shareholders to invest.

Question 4

What is EPS and why is it important?

Answer 4

EPS is widely regarded as the most important indicator of a company’s performance. This can be manipulated if the company buys back shares. Can be checked against cash flow to see if the company has using earnings to buy back shares at an inflated rate to inflate the share price.

It is used in the calculation of the P/E ratio which is closely monitored by analysts for listed companies.

The P/E ratio = Price per share / Earnings per share and this gives an indicator f the level of confidence in the company by the market. How much the market are willing to pay for a share in relation to the company’s earnings. Lower P/E Ratio potentially indicates value but could also mean slow growth. A high P/E ratio could mean the stock is overvalued or that high growth is expected.

Question 5

Diluted EPS - DEPS

Answer 5

Diluted EPS is used to show what would happen if convertible bonds had been converted at the start of the year thereby diluting the existing pool of shares with new shares being issued in the conversion.

Another effect of the conversion is the savings in interest payments on the bonds which increase revenue and will need to be calculated net of tax.

DEPS is calculated by adjusting the earnings and number of shares in the instance of convertible bonds.

1. Calculate the Basic EPS
2. Calculate the bonus (free) shares
   2a. # of options - x,xxx,xxx
   2b. # of full shares able to purchase with cash from options.:
   (# of options x option price) / Avg fair value of ordinary shares = # of full shares
3. # options less # full shares = # free shares
4. Diluted EPS = (Earnings + Finance costs saving net of tax) / (Shares bought forward + #free shares)