the weighted average number of shares can be calculated two ways:

a (170,000 x5/12) + (250,000 x 7/12) = 216,666

b (170,000 x12/12) + (80,000 x 7/12) = 216,666

Example: weighted average number of shares

Justin Time Co, a listed company, has the following share trans

Date Details

1 January 20X7 Balance at beginning o

31 May 20X7 Issue of new shares fo

31 December 20X7 Balance at year end

Required

Calculate the weighted average number of shares outstanding

lated two ways:
We had in issue 170,000 shares for 5 months and from June 1 to
december 31 (7 months) we had 250,000 shares

The first set of shares (170,000) are in issue for the entire year. The
new set of shares (80,000) are in issue from 1 june to December 31 (7
months)
Example: weighted average number of shares

Justin Time Co, a listed company, has the following share transactions during 20X7.

shares
Date Details issued

1 January 20X7 Balance at beginning of year 170,000

31 May 20X7 Issue of new shares for cash 80,000

31 December 20X7 Balance at year end 250,000

Required

Calculate the weighted average number of shares outstanding for 20X7.

Flame Co, Trading results for the year to 31 December
$
Gross Profit 200,000.00 Question
Less: Expenses (50,000.00) Flame Co is a company with a called up a
Operating Profit 150,000.00 100,000 ordinary shares of $1 each and
Preference Dividends preference shares of $1 each. The gross
(20000 x 10%) (2,000.00) trading expenses were $50,000. Flame C
Profit before Taxation 148,000.00 preference share dividend and an ordina
Income Tax Expense (40,000.00) share. The tax charge for the year was e
Profit for the year 108,000.00
Calculate basic EPS for the year

Eearnings per Share

EPS = 108000/100000 1.08 or 108c
is a company with a called up and paid up capital of
rdinary shares of $1 each and 20,000 10% redeemable
e shares of $1 each. The gross profit was $200,000 and
penses were $50,000. Flame Co paid the required
e share dividend and an ordinary dividend of 42c per
e tax charge for the year was estimated at $40,000.

basic EPS for the year

Number of Shares in issue 2011 8,000,000.00
Example: earnings per share with
Number of Shares in issue 2012
8000000 x 9/12 6,000,000.00 On 30 September 2012, Boffin Co
9000000 x 3/12 2,250,000.00 company's accounting year runs f
8,250,000.00 2012 is as follows.

EPS 2012 3300000/8250000 $ 0.40 or 40c Shares in issue as at 31 Decembe

EPS 2011 3280000/8000000 $ 0.41 or 41c
Profits after tax and preference d

Required

Calculate the EPS for 2012 and th

NB: In spite of the increase in total earnings of 20,000 in 2012, the
EPS is not as good as that of 2011, because there was extra capital
employed (1 million more shares issued to raise funds) for the final 3
months in 2012
: earnings per share with a new issue

ptember 2012, Boffin Co made an issue at full market price of 1,000,000 ordinary shares. The
y's accounting year runs from 1 January to 31 December. Relevant information for 2011 and
s follows.

2012 2011

n issue as at 31 December 9,000,000 8,000,000

fter tax and preference dividend $3,300,000 $3,280,000

e the EPS for 2012 and the corresponding figure for 2011.
 NB: since the new shares were not issued for a corresponding increa
2012 average calculation of number of shares is not required
Earnings 80,000.00
Example: earnings per share with a bonus issue
Number of Shares Greymatter Co had 400,000 shares in issue, until on 30 Septe
Shares in issue Jan 1 400000 100,000 shares. Calculate the EPS for 20X2 and the correspon
Bonus issue (30 Sept) 100000 $80,000 in 20X2 and EPS for 20X1 was 18.75c. The company's
Total Shares 500000 December.

EPS = 80000/500000 16c

the number of shares for 2011 must also be adjusted if the figures for EPS are to remain comparable
the Calculated EPS of 2011 = 18.75c
Restated EPS for 2011 = 18.75 x number of shares before bonus issue/number of shares after bonus issue
Restated EPS for 2011 = 18.75 x 400000/500000
Restated EPS for 2011 = 15c
 NB: since the new shares were not issued for a corresponding increase in resources (consideration) a weighted
average calculation of number of shares is not required

Example: earnings per share with a bonus issue

Greymatter Co had 400,000 shares in issue, until on 30 September 20X2 it made a bonus issue of
100,000 shares. Calculate the EPS for 20X2 and the corresponding figure for 20X1 if total earnings were
$80,000 in 20X2 and EPS for 20X1 was 18.75c. The company's accounting year runs from 1 January to 31
December.

e figures for EPS are to remain comparable

before bonus issue/number of shares after bonus issue

Example: theoretical ex-rights price

Suppose that Egghead Co has 10,000,000 shares in issue. It now proposes to make a 1 for 4 rights issue
at a price of $3 per share. The market value of existing shares on the final day before the issue is made is
$3.50 (this is the 'with rights' value). What is the theoretical ex-rights price per share?

Solution Working $
Before issue 4 shares with a value of $3.50 4 x 3.50 14.00
Rights Issue 1 share with a value of $3.00 3.00
Theoretical value of 5 shares 17.00

Theoretical ex-rights price = 17/5 3.40

 rights issue
sue is made is
Step 1 Calculate the Theoretical Ex-rights Price $
Before issue 5 shares, value x $1.60 (5 x 1.60) 8.00
Rights issue 1 share, value x $1.00 (1 x $1.00) 1.00
Theoretical value of 6 shares 9.00

Theoretical Ex-right Price $9/6 1.50

Step 2 Calculate the number of shares before rights issue and after rights issue
Number of Shares before rights issue 100,000
Number of Shares After rights issue:
Rights issue 1/5 x 100000 20,000
Number of Shares After rights issue: 120,000

Step 3 Use formula to find weighted average shares in issue

(i) 100000 x 9/12 x 1.60/1.50 80000

(ii) 120000 x 3/12 30000
110000

Step 4 Calculate the EPS

EPS for 2012 = 50000/110000 0.45
Example: earnings per share with a rights is
EPS for 2011 Brains Co had 100,000 shares in issue, but t
The EPS before taking into account the effect of the rights issue of $1. The market value on the last day of q
EPS = 40000/100000 = 0.40
Calculate the EPS for the year ended 31 Dec
total earnings of $50,000 in 20X2 and $40,0
EPS taking into Account the rights issue
EPS for 2011 = 0.40 x 1.50/1.60 0.38
ngs per share with a rights issue

100,000 shares in issue, but then makes a 1 for 5 rights issue on 1 October 20X2 at a price
ket value on the last day of quotation with rights was $1.60.

PS for the year ended 31 December 20X2 and the corresponding figure for 20X1 given
of $50,000 in 20X2 and $40,000 in 20X1.
Steps
1 Number of shares in issue before the bonus issue Number of Shares
Number of Shares = $6,000,000/0.50 12,000,000

2 Number of shares after bonus issue

Bonus Issue (1 for 10) 1/10 x 12,000,000 1,200,000

3 Number of Shares before rights issue 13,200,000

4 Number of Shares after the rights Issue

Rights Issue (1 for 5) 1/5 x 13,200,000 2640000
15,840,000
5 Calculate the Theoretical Ex-right Price
Before issue 5 shares, value x 2.40 (5 x 2.40) 12.00
Rights issue 1 share, Value x 1.50 (1 x 1.50) 1.50
Theoretical Value 6 shares 13.50

Theoretical Ex-right Price 13.50/6 2.25

6 Calculate the Weighted Average number of Shares

(i) 13200000 x 6/12 x 2.40/2.25 7,040,000
(ii) 15840000 x 6/12 7,920,000
Number of Shares 14,960,000

7 Calculate the EPS for 2016

EPS = 5000000/14960000 0.33

Part B
Restate the EPS for 2015
The Previously calculated EPS for 2015 is 55cents

Restated EPS for 2015 = 0.55 x 2.25/2.40 0.52

Steps
1 Number of Shares the additional equity on conversion of the loan stock will be 40000 X 4/5
Number of Shares (40000 x 4/5) 32000 shares
new total 100000 + 32000 132000

2 Earnings Farrah will save interest payments 0f $6000 this means profits will increase leading more tax
Interest Savings 40000 x 15% 6,000.00
Tax effect (6000 x 70%) 4200
New earnings
Earnings 105000
Interest Savings 4200 Example: diluted EPS
109200 In 20X7 Farrah Co had a basi
3 Diluted EPS 109200/132000 0.83 shares. It also had in issue $4
the rate of 4 ordinary shares
Required
4 Level of dilution 1.05-0.83 0.22
Calculate the diluted EPS.
ncrease leading more taxes

ample: diluted EPS

0X7 Farrah Co had a basic EPS of 105c based on earnings of $105,000 and 100,000 ordinary $1
res. It also had in issue $40,000 15% convertible loan stock which is convertible in two years' time at
rate of 4 ordinary shares for every $5 of stock. The rate of tax is 30%.
uired
culate the diluted EPS.
Ardent

EPS = 1750000/5000000 = 35c

B We must decide which potential ordinary shares are dilutive (which one decreases the EPS)

14% convertible loan stock

Earnings savings on loan interest 14% x 1000000 = $140000
Tax effect =140000 x 0.65 = 91000
Number of Shares = 1000000 x 2/10 = 200000 shares Question Diluted EPS
Ardent Co has 5,000,000 ordinary sh
Incremental EPS = 91000/200000 = 45.5c (a) $1,000,000 of 14% convertible lo
$10 of stock;
10% convertible Loan Stock (b) $2,000,000 of 10% convertible lo
Earnings Savings on the loan interest = 10% x 2000000 = 200000 $5 of stock.
The total earnings in 20X4 were $1,7
Tax effect = 200000 x 0.65 = 130000
The rate of income tax is 35%.
Number of Shares = 2000000 x 3/5 = 1200000 Required
Calculate the basic EPS and diluted E
Incremental EPS = 130000/1200000 = 10.8c

The effect of converting the 14% loan stock increase the EPS figure this means it is not dilutive and therefore should be exclud

The 10% Loan Stock is dilutive

Diluted EPS = (1750000 + 130000)/(5000000 + 1200000)
Diluted EPS = 1880000/6200000 = 30.3c
tion Diluted EPS
t Co has 5,000,000 ordinary shares of 25 cents each in issue, and also had in issue in 20X4:
000,000 of 14% convertible loan stock, convertible in three years' time at the rate of 2 shares per
stock;
000,000 of 10% convertible loan stock, convertible in one year's time at the rate of 3 shares per
tock.
tal earnings in 20X4 were $1,750,000.
te of income tax is 35%.
ed
ate the basic EPS and diluted EPS.

nd therefore should be excluded from the diluted EPS calculation