Partly Paid Shares

Partly paid shares are a type of equity instrument issued by a company where the shareholder
has only paid a portion of the nominal value or face value of the shares at the time of
issuance.
Partially paid shares are those in a firm that have not been paid in full compared to the par
value, with the understanding that more payments may occasionally be requested when the
company needs them up until the shares are entirely paid, at which point calls will stop. The
shareholder is responsible for the sums due when the corporation issues a call until the shares
are fully paid, which may or may not be indicated in the prospectus.
To the extent that partly paid shares were not to participate in dividends during the period,
they were treated as the equivalent of warrants or options in the calculation of diluted
earnings per share. The unpaid balance is assumed to represent proceeds used to purchase
ordinary shares. The number of shares included in calculated earnings per share is the
difference between the number of shares subscribed and the number of shares assumed to
have been purchased.

Example: At January 1 2021 an entity had 1000 ordinary shares in issue. It issued 800 new
shares at 1 October 2021, at a price of $4 per share. At the date of issue each shareholder paid
$2. The balance of $2 per share will be paid during 2022. Each part-paid share will be
entitled to dividends in proportion to the percentage of the issue price paid up on the share.
The entity has a year end of 31 December.
Requirement:
Calculate the weighted average number of shares for the year ended 31December 2021.
 Solution:
The new shares issued should be included in the calculation of the weighted average
number of shares in proportion to the percentage of the issue price received from the
shareholding during the period.

Share Fraction of Weighted

Average
Issued Period Shares

1 January 2021- 31 September 2021 1000 9/12 750

Issue of new shares for cash, part paid
(2/4 × 800) 400

1 October 2021- 31 December 2021 1,400 3/12 350

Weighted Average number of shares 1,100

Bonus Issue
A bonus issue, also known as a stock dividend or scrip issue, is a corporate action in which a
company distributes additional shares to its existing shareholders as a form of reward or
compensation. Unlike a cash dividend, which involves the distribution of profits in the form
of cash payments, a bonus issue involves issuing additional shares to the shareholders without
any cash outflow.
The primary purpose of a bonus issue is to enhance shareholder value and increase liquidity
in the stock. By issuing bonus shares, the company reduces the price per share and increases
the number of shares held by each investor. This action aims to make the company's shares
more affordable and accessible to a broader range of investors, potentially increasing trading
activity and market participation.
The proportional change in the number of outstanding ordinary shares is taken into account
when adjusting the number of outstanding ordinary shares prior to the event, as if it had
happened at the start of the earliest period shown. For example, on a two-for-one bonus issue,
the number of ordinary shares outstanding before the issue is multiplied by three to obtain the
new total number of ordinary shares, or by two to obtain the number of additional ordinary
shares
Example: The following information is given for an entity.
Profit attributable to ordinary equity holders for y/e 30 Sept 2021 $600
Profit attributable to ordinary equity holders for y/e 30 Sept 2022 $1200
Ordinary shares outstanding until 30 September 2022 300
Bonus issue 1 October 2022 two ordinary shares for each
ordinary
Share outstanding at 30 Sept 2022
Requirement:
Calculate the basic earnings per share for 2022 and 2021.
Solution:
The bonus issue arose in the period after the reporting date. It should be treated as if the
bonus issue arose during 2022, and EPS calculated accordingly:

Additional shares issued 300×2 = 600

Basic EPS 2022

$1200
----------------- = $1.33
(300 + 600)

Basic EPS 2021

$600
---------------- = $0.67
(300 + 600)

Rights Issue
A right issue is an issue of shares for cash to the existing ordinary equity holders in
proportion to their current shareholders, at a discount to the current market price. Because the
issue price is below the market price, a rights issue is in effect a combination of an issue at
fair value and a bonus issue.
In order to calculate the weighted average number of shares when there has been a rights
issue, an adjustment factor is required:

Pre- rights issue price of shares

Adjustment Factor =
Theoretical ex-rights price (TERP)
The TERP is the theoretical price at which the shares would trade after the rights issue and
takes into account the diluting effect of the bonus element in the rights issue. It is calculated
as:

Total market value of original shares pre rights issue + Proceeds of rights is
TERP =
Number of shares post rights issue

Example: The following information is provided for an entity which is making a rights issue.
2020 2021 2022
Profit attributable to ordinary equity holders
of the parent entity 1200 1600 1900
Shares outstanding before rights issue: 600 shares
Rights issue: One new share for each five outstanding shares (100 new shares total)
Exercise price: $4.00
Date of rights issue: 1 January 2021
Last date to exercise rights: 1 March 2021
Market price of one ordinary share immediately before exercise on 1 March 2021: $11.00
Reporting date 31 December
Requirement:
Calculate the theoretical ex-rights value per share and the basic EPS for each of the years
2020, 2021 and 2022.
Solution:
Calculation of theoretical ex-rights value per share

(600×11) + (100×4) 7000

--------------------------- = ----------- = 10
600 + 100 700

Adjustment factor = 11/10 = 1.1

Calculation of basic earnings per share

2020
2020 basic EPS as originally $1200
reported: --------------- = $2.00
600 shares

2020 basic EPS restated for $1200

Rights issue in 2021 accounts: ------------------------------------ = $1.8
600 shares× adjustment factor

2021
Weighted Average number of shares:

1 Jan- 28 February 600 ×1.1 × 2/12 110

Rights issue 100
--------
1 March- 31 December 700 × 10/12 683
---------
793

$1600
Basic EPS including effects of rights issue: --------------- = $2.02
793 shares

2022

Basic EPS: $1900

--------------- = $2.71
700 shares