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A very simple example for instance :
A company issued 200,000 shares at full market price $3.00 on July 2008
Relevant information :Profit attr. to ordinary 2008. 2007
Shareholders for $550,000 $460,000
year Ending 31.12No. Shares in issue 1000,000 800,000
at 31.12
Calculate the EPS for each yearNow Earning / shares
2007:
460,000/800,000= $0.5752008:
1.1.2008. Actual shares 800,000 fraction 6/12 = 400,000 shares1 July 2008. 1,000,000 fraction 6/12. 500,000
Total is 900,000
Therefore EPS = $550,000/ 900,000 = $0.611
Now what happened to the 200,000 share issued on 1 July 2008. As at the time we issue the share , from the calculation , it appears to me that in 31.12 2007 we had 800,000 shares and from these in issue, we issued 200,000 on 1. July 2008 after 6 months but at the end of 2008 we already had 1,000,000 shares between 1. January 2008 to 31.12. 2008 , does this mean that we only had 200,000 shares plus the 800,000 that we already had in 31.12.2007? And yet we are using 900,000shares as weighted average ordinary shares to calculate eps .Please, kindly explain to me using this examples what has actually happened .
ThanksI find it unbelievable that you can ask a question like this when similar examples are there in the course notes together with the relevant workings!
Those 800,000 that were in issue as at 31 December, 2007 are still in issue one year later at 31 December, 2008
In addition a further 200,000 were in issue for 6 months from July through to December
So:
800,000 were in issue for a full year and
200,000 were in issue for half a year … and that is the equivalent of 100,000 in issue for a full year
That gives us 900,000 equivalent shares for the year ended 31 December, 2008
Now, if you were to work through the notes, this issue is tackled a slightly different way, but it’s a way that I personally prefer
800,000 were in issue from January through to the end of June and that’s the equivalent of 400,000 in issue for a full year
Then 1,000,000 were in issue from the start of July through to the end of December and that’s the equivalent of 500,000 for a full year
So now we have 400,000 + 500,000 equivalent shares in issue for a full year and that’s a total of 900,000 equivalent shares in issue (also known as the weighted average number of shares in issue)
Now is it clear to you how the 200,000 new shares have been dealt with?
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