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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?
This is the answer and I’m just not sure as to why we apply bonus fraction 6/5 to the original 4m shares??
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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 = 3,600,000Total WANS = 1,600,000 + 3,600,000 = 5,200,000
Hi,
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
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