Earnings Per Share calculation involving Issue & Redemption of Share Capital



EPS and its link with financial resources - Concept

Earnings per share ratio is used to evaluate the performance of an entity over a period. EPS must therefore take into account the resources used to generate the earnings in an accounting period.

For instance, if a company issues share capital on the last date of an accounting period, it would not be appropriate to base the entire EPS calculation on the number of shares outstanding on the last date of the period since the earnings for that period were generated from the funds of the company exclusive of the proceeds from the issue of share capital on the last day.

Therefore, the weighted average shares in EPS calculation must be time apportioned to account for the issue and redemption of share capital during an accounting period.

Issue of share capital for consideration

EPS calculation must account for the share capital issued during the period for the number of days it was outstanding during that period. For example, if a company having a year end of 31st December issues share capital on 1st April, the number of new shares in EPS calculation must be included for 9 months only because the entity did not receive the resources in respect of those shares in the first three months of the year.

Also, where only part of the share capital has been called, the number of shares in EPS calculation must be adjusted to reflect the full share equivalent of the partly issued share capital.

Where shares are issued without any consideration (i.e. bonus shares), they are included in the EPS calculation without time apportionment as fully explained in this article: EPS involving bonus issue


Test Your Understanding

ABC PLC has a year end of 31st December 2012. During the year, ABC LTD issued 80 million new shares on 1st October 2012. Only 50% of the total amount receivable on the new shares was called at the time of issue of shares. The remaining amount is scheduled to be received on 1st January 2013. The number of shares outstanding at the start of the year were 100 million.
What is the weighted average number of shares to be used in the EPS calculation?

180 million

140 million

120 million

110 million


Redemption of share capital

As with share capital issue, redemption of share capital must be incorporated in the EPS calculation by time apportionment.

EPS calculation must account for the share capital redeemed during the period for the number of days it was outstanding during that period. For example, if a company having a year end of 31st December redeems part of its share capital on 31st March, the number of shares to be included in the EPS calculation in respect of those shares shall be 3 months because the entity would only have used the resources in respect of the issue of such shares for the first three months of the year.

Also, where only a portion of share capital has been repaid, the number of shares in EPS calculation must be adjusted to include the full share equivalents of the partly repaid shares.


Test Your Understanding

ABC PLC has a year end of 31st December 2012. During the year, ABC LTD redeemed 80 million of its existing share capital on 30th September 2012. Only 50% of the total amount payable on shares was paid on 30th September. The remaining amount is scheduled to be paid on 1st January 2013. The number of shares outstanding at the start of the year were 130 million.
What is the weighted average number of shares to be used in the EPS calculation?

50 million

90 million

110 million

120 million


Formula

Following formula illustrates how shares issue and redemption is incorporated in the Basic EPS calculation:

Basic EPS:

=Earnings attributable to ordinary share holders for the year
Weighted Average Shares [A + B - C + D]

Where:

A = Number of shares at the start of the year.
B = Shares issued during the year   x   (no. of days since issue / 365)   x   (% of cash received)
C = Shares redeemed during the year   x   (no. of days since redemption / 365)   x   (% of cash paid)
D = Number of bonus shares issued during the year.

Example

ABC PLC has a year end of 31st December 2012. On 1st October 2012, ABC PLC issued 5 million new shares for $10 million receivable 60% on the date of issue and 40% as on 1st January 2013. ABC PLC also redeemed 2 million shares in full on 1st November 2012.

Further information related to ABC PLC is as follows:

Ordinary Shares as on 1st January 2012              10,000,000

Earnings attributable to ordinary shareholders for 2012     $5,000,000

Calculation of Basic Earnings Per Share for 2012 would be as follows:

Basic EPS:

=$5,000,000
A [10,000,000] + B [756,164] - C [334,247]

=   $ 0.48 per share

Note:

A = Number of shares at the beginning of the period (given)
B = Weighted average of new shares issued during the year:
  • 5,000,000 x 92/365 x 60% = 756,164
  • Where:
  • No. of shares issued: 5,000,000
  • No. of days since 1st October: 92
  • % of cash received on issue: 60%

C  =  Weighted average of shares redeemed during the year:

  • 2,000,000 x 61/365 x 100% = 334,247
  • Where:
  • No. of shares redeemed: 2,000,000
  • No. of days since 1st November: 61
  • % of cash repaid: 100%