Earnings Per Share (EPS) 2nd Edition
Continuation from Earnings Per Share
Share Splits
When market value of a share becaomes high, can decide to increase the number of shares held by each shareholder by changing the nominal value of each share
The effect is to reduce the market price per share but for each shareholder to hold the same total value
A share split would be treated in the same way as a bonus issue.
New Issure At Full Market Value
Selling more shares to raise additional capital should generate additional earnings
Real change in the company's capital and there is no need to adjust any comparitive figures.
Unless the issure occured on the first day of the financial year, the new funds would have been available to generate profits for only a part of the year.
Buy Backs At Market Value
Companies are prompted to buy back their own shares when there is a fall in the stock market.
Main arguements that companies advance for purchasing their own shares are
Rights Issues
Giving existing shareholders the right to buy a set number of aditional shares at a price below the fair value which is normally the current market price.
Has 2 charaterisitics, both an issue of cash and because the price is below fair value, a bonus issue.
Consequently the rules for both a cash issue and a bous issue need to be applied in calculating he weighted average number of shares for the BEPS calculation.
The folowing steps are required.
Adjusting the earnings and number if shares used in diluted EPS calculation
What is dilution?
If people who are holders exercise their entitlements at a puture date, the EPS would be reduced.
Therefore the EPSwill have been diluted.
The effect on furture share price cousld be significant
Any reduction in this figure could has implications on existing shareholders.
IAS 33 requires a diluted EPS figure to be reported using the denominator potential ordinary shares that are dilutive i.e. world decrease net profit per share or increase net loss from continuting operations.
Circumstances in which the number of shares used for BEPS in increased
There are potential Ordinary Shares and these may need to be added to the Basic Weight Average Number (if they are dilutive). It is important to note that if a company has potential ordinary shares they are not automaically included in the fully diluted EPS calculation.
Circumstances in which the earnings used for BEPS increased
Share Splits
When market value of a share becaomes high, can decide to increase the number of shares held by each shareholder by changing the nominal value of each share
The effect is to reduce the market price per share but for each shareholder to hold the same total value
A share split would be treated in the same way as a bonus issue.
New Issure At Full Market Value
Selling more shares to raise additional capital should generate additional earnings
Real change in the company's capital and there is no need to adjust any comparitive figures.
Unless the issure occured on the first day of the financial year, the new funds would have been available to generate profits for only a part of the year.
Buy Backs At Market Value
Companies are prompted to buy back their own shares when there is a fall in the stock market.
Main arguements that companies advance for purchasing their own shares are
- To reduce the cost of capital when equity costs more than debt
- The shares are undervalued
- To erturn surplus cash to shareholders
- To increase the apparent rate of growth in BEPS
Rights Issues
Giving existing shareholders the right to buy a set number of aditional shares at a price below the fair value which is normally the current market price.
Has 2 charaterisitics, both an issue of cash and because the price is below fair value, a bonus issue.
Consequently the rules for both a cash issue and a bous issue need to be applied in calculating he weighted average number of shares for the BEPS calculation.
The folowing steps are required.
- Calculate the average price of shares before and after a rights issue to identify the amount of bonus the company has generated.
- The weighted averaeg number of shares is calculated for current year.
- The BEPS for current year is calculated
- The previous yeah BEPS is adjusted for the bonus element of the rights issue
Adjusting the earnings and number if shares used in diluted EPS calculation
What is dilution?
If people who are holders exercise their entitlements at a puture date, the EPS would be reduced.
Therefore the EPSwill have been diluted.
The effect on furture share price cousld be significant
Any reduction in this figure could has implications on existing shareholders.
IAS 33 requires a diluted EPS figure to be reported using the denominator potential ordinary shares that are dilutive i.e. world decrease net profit per share or increase net loss from continuting operations.
Circumstances in which the number of shares used for BEPS in increased
There are potential Ordinary Shares and these may need to be added to the Basic Weight Average Number (if they are dilutive). It is important to note that if a company has potential ordinary shares they are not automaically included in the fully diluted EPS calculation.
Circumstances in which the earnings used for BEPS increased