ACCTBA2 LECTURE Book Value and Earnings Per Share Book Value per Share (BVPS) The book value per share is of great interest and importance not only to the management of a corporation but also to the present and prospective shareholders. The shareholders from time to time (usually every balance sheet date) would like to find out how much is the value of each share of Share they own (status of their investment) as a basis for determining the market price. Book value per share is the peso equivalent of the net assets (assets less liabilities) or shareholders' equity expressed on a per share basis. In the computation of book value per share, it is assumed that the corporation will be liquidated and that the assets will be sold at their book values (no gain or loss on realization). The book value per share becomes more meaningful if it is compared with the par or stated value per share. A very high book value per share in relation to the par or stated value per share is a good indicator of the corporate's stability and/or profitability. If there is only one class of Share(ordinary shares), the book value per share is computed as follows: Total shareholders' Equity BVPS = Outstanding Shares Illustration 1 Assume the following shareholders' equity accounts: Ordinary shares, P100 par value Share Premium - Ordinary Accumulated Profits Total shareholders' Equity
P 4,000,000 400,000 600,000 P 5,000,000
The book value per share is computed as follows: P 5,000,000 BVPS = 40,000 shares = P 125/share
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When there are two classes of Share issued (preference and ordinary shares), the computation must give recognition to the special rights or preferences of the preference shares similar to the computation of the dividends per share. The computation of the book value per share for each class of Share is shown below: Preference shareholders' Equity BVPS of preference shares = Outstanding Preference shares
BVPS of ordinary shares
=
Ordinary shareholders' Equity Outstanding Ordinary shares
Note: The Ordinary shareholders' equity is the difference between the total shareholders' equity and the Preference shareholders' equity.
Earnings per Share (EPS) Earnings per share are the net earnings of a corporation for a given period of time (usually one year) translated into a per share basis of the ordinary shares. Example - Assume that the net income of a corporation for the year is P500,000 and there are 40,000 shares of ordinary shares outstanding. P 500,000 EPS = 40,000 = P 12.50 share It should be noted that EPS is applicable only to a corporation because a sole proprietorship or a partnership does not have shares of Share. Also, EPS is computed only for ordinary shares because its dividends vary from year to year depending on the amount of net earnings unlike in the case of preference shares which has a fixed dividend per share regardless of the net income. The EPS should be disclosed in the Income Statement just below the final net income.
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EPS is useful to management and other interested parties for the following reasons: 1. It can be used to evaluate the earning potential of the corporation. 2. It can be used to determine the market price of the ordinary shares. 3. It can be used for formulating dividend policies. The computation of earning per share will depend on whether the capital structure of the corporation is simple or complex. Capital structure refers to the long-term liabilities plus shareholders' equity. A simple capital structure is one where the total equity of the corporation consists of ordinary shares only. Or, if there are preference sharess or bonds payable, they are not convertible into ordinary shares A complex capital structure is one where in addition to the ordinary shares, there are other potentially dilutive securities ( securities which will increase the EPS) such as convertible preference shares or bonds. There are two types of earnings per share which can be computed according to the pronouncement of the International Accounting Standards Committee. They are the following: Basic Earnings per Share (BEPS) - This is applicable if the capital structure is simple. Diluted Earnings per Share (DEPS) - This is applicable if the capital structure is complex. Basic Earnings per Share If there is only one class of Share (ordinary shares), the formula is: Net Income Basic EPS = Weighted average outstanding shares
Page 4 If there are two classes of Share (Preference and ordinary shares), the formula is:
Basic EPS =
Net Income less Preference dividend Weighted average outstanding shares
Note: Preference dividend is subtracted from the net income only if it is declared or if not declared, only when the preference shares is cumulative. Illustration 1 Only one class of Share and no changes in the outstanding shares. Peridot Corporation has 5,000 shares of ordinary shares outstanding with a par value of P100 per share on December 31, 2012, the net income is P1,000,000. P1,000,000 Basic EPS = 5,000 shares = P200/share
Illustration 2 Only one class of Share with changes in outstanding shares. At the beginning of 2015, Topaz Corporation had 2,000 Ordinary shares outstanding. 400 shares were issued on April 1 and another 600 shares on August 1. Net income for the year was 306,000.
Basic EPS =
P 306,000 2,550 shares
= P120/share
Because there were changes in the outstanding shares during the period, the denominator should be the weighted average outstanding shares computed as follows: Date Jan1 Apr 1 Aug 1
Outstanding shares 2,000 x 2,400 x 3,000 x
Months Unchanged 3 = 4 = 5 = 12
Total 6,000 9,600 15,000 30,600
