EPS (Earning Per Share) :

Earning Per Share means Earning available per share to the share holder that is
Total earning divided by Number of Shares.
How to calculate the Number of Shares?
Suppose, Mr. A hold 10000 shares on 1st January 2013 then it purchase 2000 shares
on 31st August and Sales 1000 shares on 1st December 2013.Cacluate the total
number of Shares hold by MR.A during the year?
>> 10000 * 8/12 + 12000* 3/12 + 11000 * 1/12 =
sahres

666.67+3000+916.67 = 4583

Note: 10000 Shares are held from Jan. to August

12000 Shares are held from September to December
11000 Sahres are held from December to December end.

How to calculate the Normal EPS?

EPS is calculated by dividing Total earning with No. of shares.Suppost the earning
available to the share holder is 1000000. then EPS would be
1000000/4583 Shares
= 218.19 EPS

What is Diluted Earning Per Share?

Before moving to Diluted Earning Per Share, let us understand the word
Diluted.'Diluted' means mixing of something to the original solution.So, in Earning
per share diluted means how the Earning per share is affected by the various
options of shares issused, that is if new shares are issused then what will be the
diluted version of EPS.
>> To Calculate the Diluted EPS, One must take care of following points:

Convertible Debenture:
o

In convertible debenture, interest would be deducted and tax saving

would be added.This is because, once the debenture would get
converted in to shares, the interest which was initially deducted to

arrive the profit figure will no more required.So in future there will be
no interest and no such deduction.

So add the interest to the profit with a assumption that it will not
accrue in the future.Similarly, now there will not be any Tax saving
because of interest, so tax saving would be added to the profit.

By adding Tax saving and deducting interest it is assumed that it will

not arise in the future.

Please note that this will affect the conversion part only.Non conversion
debenture will still get interest and tax saving.So, it will not apply to
Non-Conversion of Debentures.

Now divide the total earning including incremental earning

with total Number of shares after conversion

Convertible Preference Shares:

o

The Calculation of Convertible Preference Shares would be same as

Convertible Debenture.The only difference would be in case of
Preference Shares, the interest would be deducted and tax would be
added.

Now divide the total earning including incremental earning with total
Number of shares after conversion

Right Issues:
o

In case of Right issues, First of all we calculate the theoretical Ex right

Price with the help of following formula:
Fair Value of Right Shares before issues of right shares + Total
amount received from right issues / No. of Shares out Standing
+ No. of shares issued.

Second step include calculation of adjustment factor with the help of

following factor:
Fair Value per share before right issues/Theoretical Ex right
Price

Now calculate the Diluted EPS.

Remember while calculating the diluted EPS, the old (before right
issues) outstanding shares will be multiplied with adjustment factor.

Options:

In there will no incremental in earning but of course number of shares

would increase.So we will calculate the number of Incremental shares
using the following formula given below:
Outstanding No. of Shares * (Fair value before right issuesRight issues amount )/Fair value before right issues

Now divide the total earning including incremental earning (Which will
be zero in options)with total Number of shares after conversion of
options.

ILLUSTRATIONS:
Weighted Number of Shares:
[i]No. of
Shares[/i]
[i]I[/i]
[i]ssued[/i]

[i]No.
of
Shares
[/i]

[i]No[/i][i].
of Shares
Outstandin
g[/i]

[i]Boug
ht
Back[/i
]
1st
Balan 1,800
Januar ce at
y,
begin
ning
20X1 of
year

1,800

31st
May,

Issue 600
of
share
20X1 s for
cash

2,400

1st
Buy Nov., Back
of
20X1 share
s

300

2,100

31st Balan 2,400

Dec., ce at
end of

300

2,100

20X1 year

Computation of Weighted Average:

(1,800 x 5/12) + (2,400 x 5/12) + (2,100 x
2/12) = 2,100 shares.

The weighted average number of shares can

alternatively be computed as follows:
(1,800 x12/12) + (600 x 7/12) - (300 x 2/12)
= 2,100 shares
Right Issues:
Net profit

Year
20X0 :
11,00,000

Rs.

Year
20X1 :
15,00,000

Rs.

No. of shares
outstanding prior
to rights issue

5,00,000 shares

Rights issue

One new share for each

five outstanding (i.e.
1,00,000 new shares)

Rights issue price : Rs.

15.00

Last date to exercise

rights:
1st March 20X1
Fair value of one

Rs. 21.00

equity share
immediately prior
to exercise of
rights on 1st
March 20X1
Computation of theoretical ex-rights
fair value per share

Fair value of all outstanding shares

immediately prior to exercise of rights+total
amount received from exercise

Number of shares outstanding prior to

exercise + number of shares issued in the
exercise

(Rs. 21.00 x 5,00,000 shares) + (Rs. 15.00 x

1,00,000 shares)

5,00,000 shares + 1,00,000 shares

Theoretical ex-rights fair value per share =

Rs. 20.00
Computation of adjustment factor

Fair value per share prior to exercise of

rights Rs. (21.00) = 1.05
Theoretical ex-rights value per share
Rs. (20.00)

Computation of earnings per share

Year

Year

20X0
EPS for the year 20X0 as
originally reported:
Rs.11,00,000/5,00,000
shares

20X1

Rs. 2.20

EPS for the year 20X0

restated for rights issue:
Rs.11,00,000/ (5,00,000
shares x 1.05)

Rs.
2.10

EPS for the year 20X1

including effects of rights
issue

Rs.
2.55

Rs. 15,00,000
_ (5,00,000 x
1.05 x 2/12)+ (6,00,000 x
10/12)

Convertible Debenture:
Net profit for the
current year

Rs. 1,00,00,000

No. of equity shares

outstanding

50,00,000

Basic earnings per

share

Rs. 2.00

No. of 12%
convertible
debentures of

1,00,000

Rs. 100 each

Each debenture is
convertible into

10 equity shares
Interest expense for
the current year

Rs. 12,00,000

Tax relating to
interest expense
(30%)

Rs. 3,60,000

Adjusted net profit for Rs. (1,00,00,000 +

the current year
12,00,000 3,60,000) = Rs.
1,08,40,000
No. of equity shares
resulting from
conversion of
debentures

10,00,000

No. of equity shares

used to compute
diluted earnings per
share

50,00,000 +
10,00,000 =

Diluted earnings per

share

1,08,40,000/60,00,00
0 = Re. 1.81

60,00,000

Convertible Preference:
Convertible
Preference
Shares

Attributable tax,
e.g., corporate
dividend tax

8,00,000 shares entitled to

a cumulative dividend of
Rs. 8 per share. Each
preference share is
convertible into 2 equity
shares.Further suppose
Net profit is 1,00,00,000
and No. of shares
outstanding is 20,00,000
Shares
10%

Increase in net profit

Rs. 70,40,000

attributable to equity
shareholders as adjusted by
attributable tax
[(Rs.8 x 8,00,000)+
10%(8 x 8,00,000)]
No. of incremental shares

16,00,000

{2 x 8,00,000}
Finally:
Total Profit: 10000000+7040000
= 17040000
Total Number of Shares: 2000000+1600000
= 3600000
EPS after conversion = 17040000/3600000
= 4.4
How to Calculate the Diluted EPS?
To calculate the Diluted EPS, follow the following steps:

First calculate the Incremental EPS

The least EPS would be the most diluted EPS

Consider the least EPS first and then move in ascending order.

Consider the Incremental profit and Number of shares of most diluted options
and add to the original profit and number of shares

Then, calculate the Diluted EPS.

Then move toward second diluted options and add incremental shares and
profit to the above figure.

Then calculate the Diluted EPS of second options