Topic list Syllabus reference

Solution
Before issue 4 shares, value $3.50 each
Rights issue 1 share, value $3
Theoretical value of 5 shares


= $3.40 per share
TU *• I • ux , $17.00
Theoretical ex-rights value =
Note that this calculation can alternatively be performed using the total value and number of outstanding shares.

7. 
   Procedures
   

The procedures for calculating the EPS for the current year and a corresponding figure for the previous year are:

1. 
   The EPS for the corresponding previous period should be multiplied by the following fraction. (Note. The market price on the last day of quotation is taken as the fair value immediately prior to exercise of the rights, as required by the standard.)
   

Formula to learn
Theoretical ex - rights fair value per share
Fair value per share immediately before the exercise of rights (cum rights price)

2. 
   To obtain the EPS for the current year you should:
   

1. 
   
   Formula to learn
   Multiply the number of shares before the rights issue by the fraction of the year before the date of issue and by the following fraction
   

Fair value per share immediately before the exercise of rights (cum rights price)
Theoretical ex - rights fair value per share

2. 
   Multiply the number of shares after the rights issue by the fraction of the year after the date of issue and add to the figure arrived at in (i)
   

The total earnings should then be divided by the total number of shares so calculated.

8. 
   Example: earnings per share with a rights issue
   

Brains Co had 100,000 shares in issue, but then makes a 1 for 5 rights issue on 1 October 20X2 at a price of $1. The market value on the last day of quotation with rights was $1.60.
Calculate the EPS for the year ended 31 December 20X2 and the corresponding figure for 20X1 given total earnings of $50,000 in 20X2 and $40,000 in 20X1.