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Hello,
My understanding is that Bonus Issue shares are deemed as existing on day one of the period.
Whilst working through Example 2, page 124 in Chapter 21 of the course notes I am confused.
The answer states:
2,000,000 shares for 6months
5,000,000 shares for 2months
6,428,571 shares for 4 monthsBut surely the bonus issue of 1428571 shares should exist for the full 12 months, therefore the answer I got was:
3428571 shares for 6months
6428572 shares for 6monthsCould you clarify where I am going wrong?
Many thanks
SarahBy following rule 1 in the course notes, you will find that, by multiplying all prior periods this year by the bonus fraction, the application of the fraction will have the same effect as ensuring the position that the bonus shares existed throughout the year.
The multiplication by that bonus fraction does it automatically whereas trying it your way is going to get you in all sorts of trouble
Reread the notes and then try the example doing it my way. But reread, and reread again, those rules VERY carefully.
Multiply
ALL
PRIOR PERIODS
THIS YEAR
by the bonus fractionUnderstand? No confusion? Well, about 75% of the students that I teach still get that step wrong even though I emphasise it over and over again
See how you get on! And come back to me if you’re still struggling
Thank you for that.
Yes, I get that now. Using the Bonus fraction has the effect of the bonus issue existing all year.
I have also been using Kaplan text and it makes no mention of this at all.
Thanks.
SarahWell, that’s ok then
But the offer still stands – come back to me if you need to
I attempted this question, however, I used different workings to arrive at the answer. Is it correct to do the following:
To find current EPS:
2,000,000 * 6/12 = 1,000,000
5,000,000 * 6/12 = 2,500,000Bonus issue 2:7 = 3,500,000*2/7= 1,000,000
# of shares = 1,000,000+2,500,000+1,000,000= 4,500,000
EPS = 600,000/4,500,000 = 13.3c
To find comparative EPS:
Bonus issue based on the number of shares held in prior year = 2,000,000*2/7 = 571,429
# of shares = 2,000,000 + 571,429= 2,571,429
EPS = 0.16 * 2,000,000/2,571,429 = 12.4c
Yes, that’s ok. I much prefer my layout but, so long as you keep arriving at the same answer as I and the approved publishers, then that’s fine
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