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An entity had 1 million shares in issue on 1 January 20X1. They issued 200,000 shares at market value on 1 April, followed by a 1 for 5 bonus issue on 1 August, with a further 300,000 issued at market value on 1 October.
Required
If profit for the year ending 31 December 20X1 is $230,000, what is the basic earnings per share?1 January 1 000 000 ×6/5×3/12=300 000 Shares
1 April 1 200 000×6/5×4/12=480 000 shares1 august 1 440 000 ×2/12= 240 000 shares
1 October 1 740 000×3/12= 435 000 shares
Total number of shares in EPS calculation = 1 455 000I don’t understand the reason for multiplying by 6/5 for both January and April in working 1 and 2 above. kindly explain
Hi,
If we have a bonus issue if shares, where the share are issued with no cash received, then we need to adjust the shares that have previously been in issue, effectively assuming that the shares have always been in issue. The reason behind this is that the number of shares increase as a result of the bonus issue but the earnings will not have increased as no cash has been received, so when we compare to previous periods the EPS will not be comparable.
To make the adjustment we look at the number of shares in issue after divided by the number of shares in issue before. Here there will be six in issue afterwards and there would have been 5 in issue before.
Thanks
Hello there. I have got a question which I found in a question and would really appreciate if you could help me with explanation and working.
The question: a company has 10 million $1 shares with a market value 3 dollars per share. The company wishes to raise new funds using a 1-for-4 rights issue. The theoretical ex rights price per share is $2.80. How much new finance was raised by the rights issue?
Thank you for any help and explanation.
Hi,
You would need to work backwards from the TERP to calculate the issue price, and then multiply your answer by the number of shares issued.
This is not a FR question though and would be more suited towards FM.
Thanks
Thank you very much. I have found this question in Becker revision material. Thought, it is a bit different question.
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