Chapter 14 - Earnings per share

Question 1

What is the basic calculation of EPS?

Answer 1

Earnings / number of ordinary shares

Question 1

What are earnings?

Answer 1

profit for year available to ordinary shareholders

Question 2

what is number of shares?

Answer 2

weighted average number of ordinary shares

Question 3

How do we calculate the full market value issue?

Answer 3

use weighted average table

Question 4

How do we calculate a bonus issue?

Answer 4

assume bonus shares issued with original shares, so in issue of whole of current year

Question 5

How do we calculate a rights issue?

Answer 5

use weighted average table, with pre-issue shares adjusted for bonus element using rights issue bonus fraction

Question 6

What is a bonus issue?

Answer 6

where a company issues free shares to existing shareholders in proportion to their existing holdings

Question 7

What is the bonus fraction?

Answer 7

new number of shares / old number of shares

Question 8

Why might a business decide to issue bonus issues?

Answer 8

to reduce share price to attract new investors

Question 9

Is there an injection of capital with bonus issues?

Answer 9

no

Question 10

How are bonus issues treated?

Answer 10

As if they have always been in issue

Question 11

When would a business consider a rights issue?

Answer 11

when they want to raise new finance to invest in new projects

Question 12

What is a rights issue?

Answer 12

when a business gives existing shareholder the right to buy shares in proportion to their existing shares

Question 13

What is one difference between a rights issue and a full market issue?

Answer 13

full market issue dilutes the shareholding, but rights issue maintains their percentage holding in the business

Question 14

How are rights issues encouraged to shareholders?

Answer 14

normally below market value

Question 15

What is the rights issue calculation?

Answer 15

actual market price per share / theoretical ex-rights price (TERP)

Question 16

What is the purpose of diluted earnings per share (DEPS)?

Answer 16

to show the potential impact on EPS of future share issues arising as a result of instruments in issue at the year-end.

Question 17

What are diluting instruments that are considered?

Answer 17

Convertible bonds
Options

Question 18

What is a share option?

Answer 18

gives the option holder the right to buy shares at a predetermined price at a future date.

Question 19

What happens if the market value of the shares at the future date is below the option price?

Answer 19

holder will not exercise the option

Question 20

What is the impact on earnings for convertible bonds?

Answer 20

notional interest saved (post-tax)

Question 21

What is the impact on shares with convertible bonds?

Answer 21

assume maximum conversion

Question 22

What are the steps to calculate the fully diluted EPS?

Answer 22

Step 1: calculate the Basic EPS first
Step 2: Adjust earnings and shares
Step 3: How will earnings change? (loan stock x interest rate x tax rate)
Step 4: How will the number of shares change?
Step 5: Calculation of Diluted EPS (earnings + answer to step 3 / full shares + increase of shares)

Question 23

What impact do options on DEPS have on earnings?

Answer 23

No impact

Question 24

What impact do options on DEPS have on shares?

Answer 24

number of shares increases by bonus element

Question 25

What is the 3 step process to options?

Answer 25

Step 1: Number of options in existence (basic EPS)
Step 2: Number of full price shares purchased with cash from options
Step 3: Calculate the difference as the bonus issue/ free element