Earnings Per Share and Book Value

Per Share
Earnings Per Share

▪ Earnings per share is a financial ratio that relates net income with the weighted
average number of common shares outstanding.

▪ It indicates the income earned by each share of common stock.

▪ Stockholders and potential investors widely use earnings per share in evaluating the
profitability of a company.

▪ As a result, much attention is given to earnings per share by the financial press.
Basic Earnings Per Share
Basic Earnings Per Share

Basic earnings Net Income Preferred dividends

per share (BEPS)
Weighted average number of
common shares outstanding Only deducted from net income if
one of two conditions are present

1. The preferred stock is cumulative.

2. The preferred stock is noncumulative, but dividends have been declared.

All unpaid past years’ dividends will eventually be paid

Cumulative preferred stock once the firm declares a dividend in a future period.
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Example 1

On January 1, 2014, Polaris Inc. had 240,000 ordinary shares in issue. On June 1, it
issued 160,000 ordinary shares and on December 1, it issued a further 80,000 ordinary
shares. Profit after tax for the year is $850,000. Calculate the company’s basic earnings
per share.

Weighted average # 5 6 1
240,000 400,000 480,000
of common shares 12
12 12

340,000

850,000
Basic EPS $2.50
340,000

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Bonus Issues

▪ Bonus issues such as stock dividends and stock splits are not
time apportioned.

▪ Instead, bonus issues are treated retroactively as if they

happened since the beginning of the accounting period.

▪ Bonus issues are applied to all share issuances or repurchases

that happened in the months before the bonus issue date.
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Example 2
Polaris Inc. had 1,800,000 ordinary shares in issue on 1 April 2013. A one for three bonus
issue was made on 1 June 2013. In addition, on 1 July 2013, Polaris issued 300,000 ordinary
shares at a market price of $1.40 per share. The profit attributable to ordinary
shareholders for the year ended 31 March 2014 was $2,100,000. Polaris needs to report
earnings per share for the year to 31 March 2014.

1
Bonus issue 1,800,000 600,000 1,800,000 2,400,000
3

Weighted average # 3 9
2,400,000 2700,000 2,625,000
of common shares 12 12

2,100,000
Basic EPS $0.80
2,625,000

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Example 3
The following information is provided for a firm. Shares outstanding on Jan 1: 10,000;
issued 2,000 shares on May 1; issued a 20% stock dividend on June 14; and purchased 1,000
treasury shares on July 1. Net income for the year is $30,000. The firm has 1,000 shares
of 4% $100 par value cumulative preferred stock. No dividends were declared on the
preferred stock. Calculate basic EPS.
January May
Bonus issue
10,000 1.20 12,000 2,000 1.20 2,400

Preferred dividends 1,000 4% $100 $4,000

Weighted average # 4 2 6
12,000 14,400 13,400
of common shares 12 12 12

13,100

30,000 4,000
Basic EPS $1.98
13,100 8
Example 4
On January 1, a company had 2,000 common shares in issue. On April 1, issued 1,200 shares.
On May 1, the company did a 2-for-1 stock split. On October 1, repurchased 400 shares. On
November 1, the company did a 30% stock dividend. On December 1, issued 120 shares. On
December 31, issued 200 shares. Calculate earnings per share. Assume net income is
$25,000 and the firm has 3,000, 4%, $10 par, noncumulative preferred stocks outstanding.
Dividends were declared for the period.
January
2
2,000 4,000 1.30 5,200
1
April
2
Bonus issues 1.30 3,120
1,200 2,400
1

October

400 1.30 520

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Example 4
On January 1, a company had 2,000 common shares in issue. On April 1, issued 1,200 shares.
On May 1, the company did a 2-for-1 stock split. On October 1, repurchased 400 shares. On
November 1, the company did a 30% stock dividend. On December 1, issued 120 shares. On
December 31, issued 200 shares. Calculate earnings per share. Assume net income is
$25,000 and the firm has 3,000, 4%, $10 par, noncumulative preferred stocks outstanding.
Dividends were declared for the period.

Preferred dividends 3,000 4% $10 $1,200

Weighted average # 3 6 2
5,200 8,320 7,800
of common shares 12 12 12

1
7,920 7,420
12

25,000 1,200
Basic EPS $3.21
7,420 10
Consolidated Basic Earnings Per Share

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 Parent adjusted
internally generated Parent preferred dividends Parent owned subsidiary Subsidiary BEPS
net income common shares

Weighted average parent company common shares outstanding

Example
A subsidiary company’s net income adjusted for intercompany profits is $22,000. Preferred stock cash dividends
are $2,000. The weighted average number of common shares outstanding for the subsidiary company are 5,000.
Assume the parent company owns 80% of the subsidiary and has an adjusted internally generated net income of
$40,000 and 10,000 shares of common stock outstanding. Calculate the consolidated basic earnings per share
figure.

22,000 2,000
Subsidiary BEPS = $4.00
5,000

Parent owned subsidiary shares = 80% 5,000 4,000

$40,000 4,000 $4.00

Consolidated BEPS = $5.60
10,000
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Book Value Per Share
Book Value Per Share

▪ Definition: common stockholders’ equity per share of

outstanding common stock at the end of the period.
▪ The financial ratio represents the historical value of the firm
per common share and may be used as a benchmark for
comparison with the market value per share.

Liquidation preference Preferred stock

Total equity
of preferred stock dividends in arrears

Common Stockholders’ Equity

Book Value Per Share
Ending Common Shares of Stock Outstanding
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Example
Assume the following equity section for a firm’s balance sheet.

6% cumulative preferred stock, $100 par (liquidation value $105) 10,000

Common stock 33,000
Retained earnings 12,500
Treasury stock (6,000)
Total equity 49,500
At the end of the period, the firm has 100 shares of preferred stock outstanding,
3,300 shares of common stock issued, and 300 common treasury shares. There are
two years of dividends in arrears. Calculate book value per share.

Total equity 100 $105

49,500 10,500 1,200

Book value per share $12.60
3,000
100 6% 2 years
3,300 issued shares 300 treasury shares 15
Example
Assume the following equity section for a firm’s balance sheet.
Preferred stock – par value $50 per share, 8% cumulative and participating, $150,000
5,000 shares authorized, 3,000 shares issued and outstanding
Paid-in capital in excess of par – preferred 40,000

Common stock – par value $10 per share, 50,000 shares authorized, 40,000 400,000
shares issued and outstanding

Paid-in capital in excess of par – common 100,000

Retained earnings 150,000

Total 840,000
Assume the company is paying $50,000 in dividends and the preferred stock is fully participating.

Participating dividend calculation Preferred: 8% X 150,000 = 12,000

Common: 8% X 400,000 = 32,000
Amount available for participation = 50,000 – 44,000 = 6,000
Participating dividend
Par value of stocks = 150,000 + 400,000 = 550,000
3,000 X $50 X 1.09% = $1,636
Rate of participation = 6,000/550,000 = 1.09%
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Example
Assume the following equity section for a firm’s balance sheet.
Preferred stock – par value $50 per share, 8% cumulative and participating, $150,000
5,000 shares authorized, 3,000 shares issued and outstanding
Paid-in capital in excess of par – preferred 40,000

Common stock – par value $10 per share, 50,000 shares authorized, 40,000 400,000
shares issued and outstanding

Paid-in capital in excess of par – common 100,000

Retained earnings 150,000

Total 840,000
Assume the company is paying $50,000 in dividends and the preferred stock is fully participating.

840,000 150,000 40,000 13,636

Book value per share $15.91

40,000

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Example
Assume the following equity section for a firm’s balance sheet.
Preferred stock – par value $50 per share, 8% cumulative and participating, $150,000
5,000 shares authorized, 3,000 shares issued and outstanding
Paid-in capital in excess of par – preferred 40,000

Common stock – par value $10 per share, 50,000 shares authorized, 40,000 400,000
shares issued and outstanding

Paid-in capital in excess of par – common 100,000

Retained earnings 150,000

Total 840,000
Assume the company is paying $50,000 in dividends and the preferred stock is cumulative with two years of
dividends in arrears.
Total preferred
Dividends in arrears 12,000 2 24,000 24,000 12,000 36,000
dividends

840,000 150,000 40,000 36,000

Book value per share $15.35
40,000
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End of Lecture!
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