Hi there,
I got to this example and forgot the rationale behind a Bonus Fraction of 6/5. Can't find it in my notes - please can you remind?
Wallace had $2,000,000 50¢ shares in issue on 1 January 20X4.
On 1 May 20X4, Wallace issued 500,000 shares at their market value of $1.20 each.
On 1 August 20X4, Wallace made a bonus issue of 1 share for every 5 in issue.
What is the weighted average number of shares to use in Wallace’s Basic Earnings Per Share calculation for the year ended 31 December 20X4?
Ask the Tutor ACCA FR
EPS - Bonus Fraction
This is the answer and I'm just not sure as to why we apply bonus fraction 6/5 to the original 4m shares??
--
There are $2m 50c shares in issue at the start of 20X4, giving 4 million shares in issue.
For market value issues of shares we calculate a weighted average in the year of issue.
Bonus issues are treated as if the shares were issued at the same time as the original
shares.
A bonus issue of 1 for 5 means that 900,000 (4.5m × 1/5) additional shares were issued.
We can apply a bonus fraction of 6/5 to allow for the bonus issue.
The weighted average share calculation is as follows:
b/f 4,000,000 * 4/12 * 6/5 BF* = 1,600,000
+ Market value issue = 4,500,000
+ 1:5 Bonus issue of 900,000 = 5,400,000 * 8/12 = 3,600,000
Total WANS = 1,600,000 + 3,600,000 = 5,200,000
6y ago#2Hi,
The bonus fraction is calculated as the number of share in issue after divided by the number in issue before. As it is a one for five issue, there are five in issue before and six after, hence the 6/5.
This is then applied to the shares in issue before the issue took place.
Thanks
Sign into reply to this topic.