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
- Explain why EPS is regarded as so important that the IASB has issued an accounting standard on its calculation; (3 marks)
- 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 31st December, 2018