Net Profit available for Equity Share Holders is divided by Weighted Average of the Number of Equity Shares of the Company issued at different dates.
TYPES OF EPS
Basic EPS
Basic EPS = (Net Profit for Equity Share Holders)/(Weighted Average of the Number of Equity shares of the Company).
If the Shares are issued at different dates then it is better to find the weighted average of the number of Equity shares of the company
Example:
01-01-11 Number of Shares 5,00,000
01-03-11 Right Issue 1:5
Fair Value before Right Issue = Rs. 21
Issue Price of Right Shares = Rs. 15
Net Profit = Rs. 15,00,000; P.Divi. = Nil
Find EPS.
Solution:-
No. of shares before right issue (2 months) = 500000
Number of right shares = 100000
No. of shares after right issue (10 months) = 600000
The price of shares before Right issue is Rs 21. Right shares are issued at Rs 15 each (below the market price). It makes an adverse effect on the market price of the shares.
Therefore the 'Average Price' or the theoretical fair market price of the shares after right issue will be reduced as follows.
=(5,00,000 shares @ 21 +1,00,000 shares @ 15)/(5,00,000+1,00,000)
= (5X21 + 1X15)/(5+1)
= 120/6 = 20
Therefore 5,00,000 original shares are of Rs 21each
1,00,000 right shares are of Rs 15 each
Total 6,00,000 shares are of Rs 20 each.
One original share is equivalent to (21/20) = 1.05 of Share after right issue, (Known as Right Factor) and
One Right Share is equivalent to (15/20) = 0.75 of share after right issue.
1 Share of Rs 21 each = 1.05 shares of Rs 20 each.
1 Right Share of Rs 15 each = 0.75 Share of Rs 20 each.
Therefore 5,00,000 shares of Rs 21 each are equivalent to 5,00,000X1.05 = 5,25,000 shares of Rs 20 each.
And 1,00,000 Right shares of Rs 15 each are equivalent to 1,00,000X0.75 = 75,000 shares of Rs 20 each.
Total No. of Shares = 5,25,000 + 75,000 = 6,00,000
Weighted average Number of Equity Shares
= (5,25,000X2 + 6,00,000X10)/(2+10)
= (10,50,000 + 60,00,000)/12
= 70,50,000/12
= 5,87,500
The same result can be obtained with the help of the following formula.
W Average = [(N1 X Right Factor X W1) + (N2 X W2)]
= [500000X(1.05)X2/12 + 600000X10/12]
= [525000X2/12 + 600000X10/12]
= [87500 + 500000]
= [587500]
EPS = (PAT - PD)/(Weighted Av. of No. of Equity share)
= 15,00,000/5,87,500
= 2.55 Rs Per Share
TYPES OF EPS
Basic EPS
Basic EPS = (Net Profit for Equity Share Holders)/(Weighted Average of the Number of Equity shares of the Company).
If the Shares are issued at different dates then it is better to find the weighted average of the number of Equity shares of the company
Example:
01-01-11 Number of Shares 5,00,000
01-03-11 Right Issue 1:5
Fair Value before Right Issue = Rs. 21
Issue Price of Right Shares = Rs. 15
Net Profit = Rs. 15,00,000; P.Divi. = Nil
Find EPS.
Solution:-
No. of shares before right issue (2 months) = 500000
Number of right shares = 100000
No. of shares after right issue (10 months) = 600000
The price of shares before Right issue is Rs 21. Right shares are issued at Rs 15 each (below the market price). It makes an adverse effect on the market price of the shares.
Therefore the 'Average Price' or the theoretical fair market price of the shares after right issue will be reduced as follows.
=(5,00,000 shares @ 21 +1,00,000 shares @ 15)/(5,00,000+1,00,000)
= (5X21 + 1X15)/(5+1)
= 120/6 = 20
Therefore 5,00,000 original shares are of Rs 21each
1,00,000 right shares are of Rs 15 each
Total 6,00,000 shares are of Rs 20 each.
One original share is equivalent to (21/20) = 1.05 of Share after right issue, (Known as Right Factor) and
One Right Share is equivalent to (15/20) = 0.75 of share after right issue.
1 Share of Rs 21 each = 1.05 shares of Rs 20 each.
1 Right Share of Rs 15 each = 0.75 Share of Rs 20 each.
Therefore 5,00,000 shares of Rs 21 each are equivalent to 5,00,000X1.05 = 5,25,000 shares of Rs 20 each.
And 1,00,000 Right shares of Rs 15 each are equivalent to 1,00,000X0.75 = 75,000 shares of Rs 20 each.
Total No. of Shares = 5,25,000 + 75,000 = 6,00,000
Weighted average Number of Equity Shares
= (5,25,000X2 + 6,00,000X10)/(2+10)
= (10,50,000 + 60,00,000)/12
= 70,50,000/12
= 5,87,500
The same result can be obtained with the help of the following formula.
W Average = [(N1 X Right Factor X W1) + (N2 X W2)]
= [500000X(1.05)X2/12 + 600000X10/12]
= [525000X2/12 + 600000X10/12]
= [87500 + 500000]
= [587500]
EPS = (PAT - PD)/(Weighted Av. of No. of Equity share)
= 15,00,000/5,87,500
= 2.55 Rs Per Share