# EPS explained

ACCA FR Exam Tips: EPS and Diluted EPS

## Understanding Basic EPS

Basic EPS is calculated using the formula:

Basic EPS = Net profit or loss attributable to equity shareholders / Weighted average number of ordinary shares outstanding during the period

### Steps to Calculate Basic EPS:

1. Determine the net profit or loss attributable to equity shareholders.
2. Calculate the weighted average number of ordinary shares outstanding during the period.

## Understanding Diluted EPS

Diluted EPS takes into account the potential dilution that could occur if convertible securities (like options, warrants, or convertible bonds) were exercised. The formula is:

Diluted EPS = (Net profit or loss attributable to equity shareholders + After-tax interest on convertible debt) / (Weighted average number of ordinary shares + Potential ordinary shares from conversion)

### Steps to Calculate Diluted EPS:

1. Calculate the basic EPS as described above.
2. Identify all potential dilutive securities (e.g., options, convertible bonds).
3. Adjust the numerator by adding back any after-tax interest on convertible debt.
4. Adjust the denominator by adding the number of shares that would be issued on conversion of all dilutive potential ordinary shares.

## Weighted Average Shares for Bonus and Rights Issues

### Bonus Issues:

A bonus issue is when additional shares are given to existing shareholders for free. These are treated as if they were in issue from the beginning of the year.

#### Steps to Calculate Weighted Average Shares for Bonus Issues:

1. Calculate the bonus fraction: Bonus fraction = Number of shares after the bonus issue / Number of shares before the bonus issue
2. Apply the bonus fraction to the shares outstanding before the bonus issue to adjust the weighted average number of shares.

### Rights Issues:

A rights issue allows existing shareholders to buy additional shares at a discount. The calculation involves adjusting for the theoretical ex-rights price (TERP).

#### Steps to Calculate Weighted Average Shares for Rights Issues:

1. Calculate the rights fraction: Rights fraction = Cum-rights price / TERP
2. Adjust the number of shares before the rights issue by multiplying by the rights fraction.

### Example Calculation:

Suppose a company had 100 shares at the beginning of the year, issued 400 shares at full market price on May 1, and issued a 1-for-5 bonus issue on July 1.

Date Total Shares Time (months) Bonus Fraction Weighted Average
1st Jan 100 4/12 6/5 40
1st May 500 2/12 6/5 100
1st July 600 6/12 1 300
Total 440

Weighted Average = 40 + 100 + 300 = 440

## Tips for Remembering EPS and Diluted EPS:

• Understand the formulas and the logic behind them.
• Practice with examples to get comfortable with the calculations.
• Watch classroom videos to reinforce your understanding.

By breaking down the steps and practicing regularly, you can master the concepts of EPS and Diluted EPS. Good luck with your exam!