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Int. Acc. FA LECT 5&6: CH 16 part 6: Dilutive securities and EPS (EPS…
Int. Acc. FA LECT 5&6: CH 16 part 6: Dilutive securities and EPS
EPS-simple capital structure (II)
Weighted-average number of shares outstanding: companies issue/purchase shares during the year.
Calculate weighted-average according to fraction of the year.
EPS-simple capital structure (III): note we need to readjust for:
Share splits: suppose that the company issues a 2 for 1 split, we readjust all amounts prior to the split by multiplying with 2. This makes for a fair comparison.
Why? Share splits and share dividends increase the number of shares, so EPS decreases. BUT, each shareholder’s proportional stake doesn’t change. Restating prevents it from looking like each shareholder’s claim to earnings drops due to these events.
Share dividends (see previous example)
E.g.,exercise 16-17.
Also take a look at the comprehensive example on p. 842- 843.
EPS-simple capital structure (IV)
Each investor gets shares proportionally to his ownership
10% ownership per investor (11 out of 110)
10% share dividend -> 10 new shares issued
Same for share splits, e.g. 2-for-1 split
10% ownership per investor (10 out of 100)
10% ownership per investor (20 out of 200)
100 shares, held equally among 10 investors
Each shareholders’ claim does not change!
EPS-simple capital structure (V)
BUT: This is not true, because although the earnings per share is halved, the earnings per shareholder does not change as each investor has twice as many shares
The share dividend/ share split does not affect wealth of existing shareholders
Without restating, EPS would drop significantly for
shareholders
We therefore have to adjust for these events to allow a fairer comparison over the year
Each shareholders’ claim does not change!
EPS-simple capital structure (VI)
9.09% ownership per investor (10 out of 110)
Repurchase 10 shares, but 5 each from two
shareholders
Issue 10 new shares and all are purchased by a new shareholder
5.56% ownership for those two investors (5 out of 90)
In these cases, the proportional interest in the company
can change
This is different for share repurchases/ share issuances
11.11% ownership for the 8 other investors (10 out of 90)