L6

Question 1

what IAS is basic EPS

Answer 1

IAS 33

EPS is regarded as a KPI

Question 2

what is the formula for basic EPS

Answer 2

Profit for financial year-preference dividends/ weighted average number ordinary shares

Question 3

What are the implications of a high P/E

Answer 3

That the earnings are too low
or share price is too high
or earnings are . going to increase in the near future
investment is overpriced

Question 4

What are the implications of a low P/E

Answer 4

investment is underpriced so could be an investment opportunity
flag up that theres a reason that needs looking into about

Question 5

Calculate the market value of an unlisted company with an EPS of 39p and industry average P/E 23.2

Answer 5

P/E = MV/EPS
23.2 = MV/0.39
MV = 9.05

Question 6

What reasons could a company give for an exceptional item/material

Answer 6

an item not expected to happen frequently

• restructuring costs following a takeover
• profits or losses on disposals of a NCA
• profits or losses on disposals of discontinued operation

Question 7

What are discontinued operations

Answer 7

IFRS 5

• major segments sold during the year or held for sale at year end
• income and expenses for the year must be disclose separately as well as profit or loss on disposal

Question 8

under what framework do exceptional circumstances affect the calculation of basic EPS

Answer 8

IAS 33

They don’t affect the calculation

Question 9

What is the use for a headline EPS

Answer 9

single earnings number which can be used as an unambiguous reference point - South African circular 2007
Endorsed by CFA

Question 10

What is the headline EPS

Answer 10

it eliminates profits or losses on sale of NCA and discontinued activities

• adds re-measurement charges e.g impairment
• Depreciation and amortisation allowed as considered to relate to the use of the NCA in the operations

Question 11

Is headline EPS unambiguous

Answer 11

NO

You would add back Loss on sale and they would be different and residual value and useful life are estimated

Question 12

How to calculate Headline EPS

Answer 12

1. PAT including PAT of discontinued ops and acquisitions
2. • or - profit or losses on sale or termination of discontinued operations and sale of NCA
3. • impairment of NCA

Question 13

What are maintainable earnings

Answer 13

• similar to headline but aims to measure the level of earnings achievable on an ongoing basis
• better measure of trend analysis - eliminates anomalies in reported profits not like to recur

Question 14

How can you calculate maintainable earnings

Answer 14

1. Headline earnings
2. • or - profits or losses after tax of discontinued operations
3. • or - other exceptional profits or losses not already eliminated