1. Module 9 Earnings per share
Financial Accounting 3
Module 9
Earnings per share

2. Theoretical foundation
EPS is a profitability ratio that public companies must provide to investors.
The figure is used to determine the market value of the shares.
P/E ratio
Price/earnings ratio = market price/EPS once the P/E is established the new EPS can be used to estimate market price of the shares, if other considerations are constant.

3. Basic EPS
Income available to ordinary shareholders divided by the weighted average number of ordinary shares
EPS is calculated before and after discontinued operations.

4. Income available to common shareholders
Net income
Less
Preferred dividends, declared or current cumulative
Loss on retirement of preferred shares charged directly to retained earnings

5. Weighted average number of ordinary shares
WAOS
The ordinary shares are weighted by the amount of time they are outstanding during the year.
Then an average is calculated.
Stock dividends, splits and contingently issuable shares are backdated to the beginning of the year.

6. Diluted EPS
Only calculated when complex capital structure exists for the company, that is
Convertible bonds
Convertible preferred shares
Options or warrants outstanding for common shares
Contingently issuable shares

7. Steps for diluted calculations
Calculated basic EPS
Calculated the individual effect of items that may be dilutive.
Determine if each item is potentially dilutive. (options in the money always are dilutive)
Rank the items by their effect (options first)
Calculate the diluted EPS one item at a time, seeing if the next ranked item is still dilutive.
When there are no more dilutive items, you have the diluted EPS.

8. Options/Warrants Options are dilutive if they are in-the-money.
If quarterly share prices are given, this calculation is done quarterly
Use the treasury share method
Back date to beginning of year or when issued, if issued during the year

9. Contingently issuable shares
The number of contingently issuable shares is added to the denominator if the only element not met is the date of the contingency period has not yet expired.

10. Preferred shares Calculate the dividends that would have been saved
Calculate the increase in ordinary shares
Back date to beginning of year or when issued, if issued during the year

11. Bonds Calculated the interest that would have been saved
Don’t forget the tax effect
Calculated the increase in the common shares
Back date to beginning of year or when issued, if issued during the year

12. Conversion during the year
Back date any conversions that took place during the year to the beginning of the year or date of issue if issued during the year.

13. Disclosures
Page 1134 of textbook