Earnings per share (EPS) are generally regarded as a key accounting ratio for use by investors and others. Like all accounting ratios, however, it has its limitations. You have been asked to make a brief presentation to CA students on the topic.

Required

1. Explain why EPS is regarded as so important that the IASB has issued an accounting standard on its calculation;                                                                                                          (3 marks)
2. Explain the general limitations of the EPS accounting ratio and its specific limitations for investors who are comparing the performance of different entities

b,

On 1 February 2017, C and D Limited, a listed entity had 3 000 000 ordinary shares in issue. On 1 March 2017, C and D made a rights issue of 1 to 4 at N$6.50 per share. The issue was completely taken up by the shareholders.

 

Extracts from C and D Limited’ financial statements for the year ended 31 January 2018 are presented as follows

	N$ 000
Operating profit	1 380
Interest payable	(400)
Profit before tax	980
Income tax	(255)
Profit for the period	725

Extracts for the summarised statement of changes in equity for the year ended 31 January 2018 as follows:

	N$ 000
Balance as at 1st February 2017	7 860
Issue of share capital	4 875
Surplus on revaluation of PPE	900
Profit for the period	725
Ordinary dividend	(300)
Balance as at 31 January 2018	14 060

Just before the rights issue, C and D Limited’ share price was N$7.50 rising to N$8.25 immediately afterwards. The share price at close of business on 31 January 2018 was N$6.25.

 

At the beginning of February 2018 the average price ratio in C and D Limited ‘business sector was N$28.4 cents and the P/E ratio of its principal competitor was N$ 42.5 cents.

Required:

Calculate the earnings per share for C and D Limited for the year 31 January 2018 and its P/E ratio at that date                                                                                                                              (6 marks)

 

c)

Talbot Plc has in issue 5 000 000 ordinary shares throughout 2017. During 2016 the company had given senior executives options over 400 000 shares excisable at N$1 10 at any time after May 2019. None were exercised during 2018. The average fair value of one ordinary share during the period was N$1.60.  Talbot Plc had made a profit after tax of N$ 540 000 in 2018.

 

Required

What is the basic and diluted earnings per share for the year ended 31^st December, 2018