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Dear Mike,
I am still struggling in applying rules to calculate EPS when there is bonus and rights issue.
In previous question, I have asked about inconsistency in practice question 1 and 5 and you have suggested to apply rules very precisely.
The rule I spotted is that bonus issue is treated as though additional shares have been in existence at the start of the year. Yet in question 5 solution, the term before the bonus issue is included in the first part of calculation.
Could you please explain or spot which rule I am missing in understanding this question?
Thank you.
The rules are:
1) Multiply ALL prior periods this year by the bonus fraction, and
2) Multiply last year’s disclosed earnings per share by the reciprocal of the bonus fraction
This rule that you spotted …
“The rule I spotted is that bonus issue is treated as though additional shares have been in existence at the start of the year”
… that’s not one of my rules! Where have you found that? It’s certainly not in the course notes
The rules for rights issues are on page 120 of the course notes and for bonus issues the rules are on page 121
Please, try using my rules and agree with me that it’s now no longer confusing and it really is very straight forward
Let me remind you – there are just 2 rules and neither of them reads as “bonus issue is treated as though additional shares have been in existence at the start of the year”
The rules are:
1) Multiply ALL prior periods this year by the bonus fraction, and
2) Multiply last year’s disclosed earnings per share by the reciprocal of the bonus fraction
Try it!
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