Chapter 24 Earnings per Share1. Objectives1.1 Define earnings per share (EPS).1.2 Describe the problem areas in determining EPS.1.3 Be familiar with the disclosure reuirements under !"#S 33.1.$ %alculate the earnings per share for a gi&en situation.1.' Discuss the implication of earnings per share where dilution of euit( will occur andcompute the full( diluted EPS.E a r n i n g s ) e i g h t e d# & e r a g e * o .o f S h a r e s+ u l l, a r - e tP r i c eB o n u s. s s u e/ i g h t. s s u eD i s c l o s u r e/ eu i r e m e n t s, u l t i p l e% a p i t a l% h a n g eB a s i c E P SS i n g l eD i l u t e d, u l t iD i l u t e d% o n & e r t i b l eB o n d s 0P r e f e r e n c eS h a r e s1 p t i o n s 0) a r r a n t sP a r t l (P a i dS h a r e s% o n t i n g e n t l (. s s u a b l eS h a r e s1 r d e r o fD i l u t i o nD i l u t e d E P SD e f i n i t i o n sP u r p o s e*2$212. Basic EPS2.1 EPS is perhaps the most extensively use stoc! mar!et inicator. .t shows the profitattributable toeacheuit(share3 andis consideredb(man(in&estors tobe animportant measure "or assessing the pro"itability o" a company.2.2 .t also "orms a basis "or calculating the price#earnings rate (P4E ratio)3 which is theratio of a share5s mar-et price to its earnings per share.2.3 .t is of particular importance in comparing the operating results o" a company overaperioo" time3 or incomparingtheper"ormanceo" onecompany$se%uitysharesagainstthato"another company$se%uityshares. 6hiscomparisonneedsuniformit( of calculation of EPS for all companies.2.$ &e"initions(a) #n ordinar( share 7 is an euit( instrument that is subordinate to all otherclasses of euit( instruments.(b) #n potential orinary share 7 is a financial instrument or other contract thatma(entitleits holder toordinar(shares. E8amples of potential ordinar(shares are9(i) debt or euit( instruments3 including preference shares3 that arecon&ertible into ordinar( shares. 6his includes partl( paid shares.(ii) share warrants and options.(iii) emplo(ee plans that allow emplo(ees to recei&e ordinar( shares as partof their remuneration and other share purchase plans.(i&) shares which would be issued upon the satisfaction of certainconditions resulting fromcontractual arrangements3 such as thepurchase of a business or other assets.(c) )arrants or options are financial instruments that gi&e the holder the right topurchase ordinar( shares.2.' 6he basic EPS calculation is simpl(9EPS : Earnings)eighted a&erage number of ordinar( shares outstanding2.; Earnings 7groupprofit after ta83 less non2controllinginterests andirredeemablepreference share di&idends.*2$22'. Computation o" Basic EPS()* Changes in capital structure3.1 )here&er a change in ordinar( share capital occurs during the accounting period3 anadation or bonus issue= and(c) rights issue.(a) Issue at full market price3.3 )here new ordinar( shares ha&e been issued for full consideration during the period3theearnings shouldbeapportionedo&er theweighteda&eragenumber of sharesoutstanding during the period.3.$ Example 1# compan( issued 2??3??? shares at full mar-et price (@3.??) on 1 Aul( 2?11./ele&ant information92?11 2?1?@ @Profit attributable to the ordinar(shareholders for the (ear ended 31 Dec.''?3??? $;?3???*o. of ordinar( shares in issue at 31 Dec. 13???3??? B??3???+e%uire,%alculate the EPS for each of the (ears.Solution,*2$232?1? : ??? 3 B????? 3 $;? @ : 'C.'c2?11 : ) ??? 3 2??21( ??? 3 B????? 3 ''? @ + : ;1.11cSincethe2--.---shares haveonlycontribute"inance"orhal" ayear3 thenumber of shares is adation issue on 1 1ctober 2?11 13???3??? 13???3???*o. of shares '3???3??? '3???3???Basic EPS 1?.?c B.?c.n the 2?1 account3 the EPS for the (ear would ha&e appeared as 1?c(@$??3???4'3???3???). .nthee8ampleabo&e3 thecomputationhasbeenrewor-edfrom scratch.Sincetheoldcalculationwasbasedondi&idingb($3???3???whilethenewisdetermined b( using '3???3???3 it would be necessar( to multipl( the EPS b( the firstand di&ide b( the second. 6he fraction to appl( is3 therefore3??? 3 ??? 3 '??? 3 ??? 3 $ or '$%onseuentl( 1?c 8 '$ : B.?c.(c) Rights issue3.C /ights issues present special problems3 because the( are normall( below full mar-etprice and therefore combine the characteristics of issues at full mar-et price and bonusissues as abo&e.3.B .n such a case3 !"#S 33 states that it is necessar( to ad