Basic EPS Earnings available to Equity Shareholders/ WA no: of equity Shares or CS O/S

where, Earnings available to equity Shs = NI - Preferred dividend

1 Assume a Co has the following capital structure

Q Calculate EPS in case of cumulative and non cumulative preference shares
8% preference stock $400
Common stock 100
NI $932
The company declares no dividends

a) EPS in case of non cumulative Pref Shares

932/100 9.32
b) EPS in case of cumulative Pref Shares
Earnings available to Equity S/H 932 - 8%*400
900
900/100 9

Weighted Average Number of common shares o/s

a) Issued, 1/1/10 500 500*12/12 500

Issued, 7/1/11 100 100*6/12 50
Issued, 10/1/11 300 300*3/12 75
Total shares o/s on 12/31/11 900 625
Calculate the weighted avg no: of shares O/S as on 12/31/2011

Stock dividends, stock splits or stock subscriptions

> retroactively adjusted
Treat them as if they were always present in the capital structure from beginning

Stock dividends (or bonus issue), stock splits and stock subscriptions shares are treated as if they had always been outstanding and inc
current year. If prior periods are presented, the effects of stock dividends and stock splits must be retroactively adjusted
b)
Assume that 100 shares issued on 7/1/11 were the result of 20% stock dividend on 500 shares previously o/s
 Issued, 1/1/10 500 500*12/12 500
Issued, 7/1/11 100 100 100
Issued, 10/1/11 300 300*3/12 75
Total shares o/s on 12/31/11 900 675

2 Stock split, stock dividend and treasury stock buy back/ repurchase

1-Jan 100,000 shares were o/s 100,000.00

1-Apr 80000 shares were issued 60,000.00
1-Jul 10% stock dividend 16,000.00
1-Sep 18000 Treasury stock repurchased -6,000.00
31-Dec 2 for 1 stock split 170,000.00
Total weighted average no: of shares o/s for 2011 340,000.00

EA equity Shs Common stock dividend is not to be considered

WA no: of shares o/s Prefer shares are not to be considered
 8%*400 = 32$

WA shares o/s

they had always been outstanding and included at full amount for
splits must be retroactively adjusted for those periods.

00 shares previously o/s

Retroactively adjusted

WA shares o/s

80000*9/12
160000*10%
18000*4/12

170000*2
Net Sales
less: COGS
GP GP/ Sales * 100 GP ratio
less: S, G &A Pref dividend
Operating Income/ EBIT EBIT/ Sales *100 OP ratio
Less: interest 1. Cum
EBT 2. Non cum
less: Tax If the Q is silent
EAT/ NI XXX NP/ Sales * 100 NP ratio 1. Cum or non cum
less: Preference dividend (XX) generally a fixed % 2. Declared or not dec
Earnings available to Equity SHs XXX dividend + RE
WA No: of equity shares o/s EPS

Preference shares based on Cumulative or non cumulative

Cumulative : Even when the company doesn't declare any dividend, dividend gets
cumulated and company has to pay this in the later years -> Dividend in arreas

Example 10% on the FV of the share 100

Amount accrued Paid
2023 10 Not declare 0
2024 10 Not declare 0
2025 10 Declare 30
declared not declared
minus the dividend
minus the dividend not minus div

Cum
declared
Two types

Preference Equity Residual owners

4% Preference shares dividend
FV/ Par value 100
dividend 4 4%*100
declared not yet paid announced
paid actual payment

P/S Cumulative v/s non cum

Convertible v/s non con

Authorised SC Max no: of shares

Issued capital
o/s
in Millions
Bank loan 100
Interest 10% P.A
Interest 10%*100* 6/12 6 months
Treasury stock method
Warrants & options Investor Co.
40 options unexcercised Co. had issued the employees 40 ESOPs @ 15$ 40*15 600 Net proceeds
Buy back the shaes @ avg MP during the yr 20
Buy back the shaes @ avg MP during the yr 30 600/20
Net shares o/s 40-30 10 shares

Vesting period time gap between issuance of option to employees & their right to excerice
 Complex capital strcuture is when a company issues other instruments which can be converted t

Without considering convertible securities

EA eq sh
No: of shares o/s
EPS (basic)

With considering convertible securities

EA eq sh
No: of shares o/s
EPS (diluted)

Under the “If-converted method” convertible securities are assumed to have been converted at the beginning o
at the time of issuance, whichever is later. “Anybody who could covert does so.”

If the date of issue was prior to current year, conversion effect is taken from beginning of current ye
convertible securities were issued during the year, their impact to calculate diluted EPS would be given effect from
issue. These securities did not exist at the beginning of the period and cannot be converted as of that date.

1 Convertible Preference stock

CPS co. has 932 $ NI for the year and following is the capital structure

Preferred stock, 100 par, 8% cumulative, 4 shares each convertible into 10 shares of c/s
Common stock, $1 par, 100 shares

a) Basic EPS
b) Diluted EPS
Earnings (without prefernce dividend)
No: of shares
Diluted EPS
 EPS Effect of Convertible Preferred Shares =

2 Convertible Bonds
CB Co. has 900 of NI and tax rate of 30%, capital structure is as follows
6% convertible bond, 1000$ face value, convertible into 20 shares of c/s
C/S $1 par, 100 shares

a) Basic EPS
b) Diluted EPS
Net Earnings (net of tax)
Shares O/S

Step 1: Calculate Interest Expense

Step 2: Calculate interest tax shield = Interest expense * tax rate
Step 3: Calculate net savings, Step 1 - Step 2

EPS Effect of Convertible Bonds =

Warrants & Options

W& Co. has 900$ NI and below is the capital structure

Common stock, $1 par, 100 shares

W& Co. also had unexcercised stock options to purchase 40 shares of c/s at 15$ per share o/s at the beginning of the year
W&O's stock was $20 during the year

a) Basic EPS
b) Diluted EPS
 Net Earnings
No: of shares outstanding
40 options * 15 option price (strike price)
No: of treasury shares repurchased @ Avg MP of 20$
Therefore, dilutive effect is

Calculating Diluted EPS for Complex Capital structure

If the options give purchasers the right to purchase stock at an exercise price that is below the average ma
number of treasury shares presumed to be purchased with the proceeds of the sale will be less than the number
would be sold in the option conversions. Thus, the net number of outstanding shares will increase, and the
common stock will be dilutive.

If the exercise price of the options or warrants is above the average market price, the number of treasury shares that c
purchased with the proceeds of the sale would be greater than the number of shares that would be sold in the option conve
net number of outstanding shares would decrease. Thus, if the exercise price of options or warrants is higher
average market price for the period, the options or warrants are antidilutive. Furthermore, if the exercise price is
average market price, the options or warrants would not be exercised.

Earnings =
1. NI - Preferred dividend ( cumulative or non cum)
+ 2(a) Preferred dividend (NOT NET of tax)
+ 2(b) Interest expense saved from convertible bonds (Net of tax)
+ 3. $0 from treasury stock
1. Weighted avg no: of shares o/s (dividends, stock split - retroactive adj)
+ 2 (a,b). # of shares convertible security - preferrence shares and convertible bonds (Not weighted)
+ 3. Incremental # of C/S o/s from treasury stock method
which can be converted to common stock -> EPS will get diluted

1000 $
100
10 $

if converted method
1000
120 Increase (20 prefrence shares that are
8.333333333 convertible to 20 equity shares)

onverted at the beginning of the period or

.”

m beginning of current year. If

EPS would be given effect from the date of
nverted as of that date.

NI/ Total existing C/S + converted C/S

400
100

932-(8%*4*100)/100 9

932
100+40 (4*10)
932/140 6.66
 Dividends Earned (cumulative) and/or Declared (noncumulative)
# of Common Shares the Preferred Shares are Converted Into

32 0.8
40 $

1000
100

900/100 9

900+42 7.85
100+20 120

1000*6% 60 savings in int

60*30% 18 extra pay for tax
60-18 42

Interest on the Bonds × (1 – Tax Rate)

# of Shares the Bonds are Converted Into

42 2.1
20
Treasury stock method

100

o/s at the beginning of the year. The average market price of

900/100 9
900/100 + 10 8.18
 900

600
30
40-30 10

t is below the average market price, the

will be less than the number of shares that
hares will increase, and the potential

umber of treasury shares that could be

ould be sold in the option conversions, and the
ptions or warrants is higher than the
hermore, if the exercise price is above the
Potential common shares are included in the calculation of DEPS only if they are dilutive. Potential common shares are
dilutive if their exercise or conversion into common stock during the period would have caused a decrease in Basic
Earnings Per Share. If their exercise or conversion would have caused an increase in basic earnings per share (as
some potential common shares can do), they are antidilutive and are not included in the calculation of DEPS.

Each issue of potential common stock must be considered individually in determining whether it is dilutive and thus to
be included in the calculation of DEPS, or whether it is antidilutive and should be excluded from the calculation of DEPS
The effect on EPS of each issue of potential common stock must be considered in the proper sequence, from the most
dilutive to the least dilutive. If they are considered in the wrong sequence, the resulting DEPS could be
incorrect.

EPS Effect The additional income that would have been available to
by the additional shares that would have been o/s

EPS Effect of Convertible Bonds = Interest on the Bonds × (1 – Tax Rate)

# of Shares the Bonds are Converted Into

EPS Effect of Convertible Preferred Shares = Dividends Earned (cumulative) and/or Declared (noncum
# of Common Shares the Preferred Shares are Converte

The lower the EPS effect (ratio) is, the more dilutive a security

Steps
1. Calculate BEPS
2. Add effect of warrants & options (since they will be always be MOST dilutive) - if any
3. Calculate the EPS effect from convertible securities
4. Rank from MOST to LEAST dilutive
5. In the same order -> add the effect of each of the convertible securities
6. Determine final DEPS

Remember that the calculation of DEPS is done with potentially issuable shares that have not yet been issued. Any of the potentially is
that were converted into common stock during the year are excluded because they are included in the calculation of Basic EPS instead
Remember that the calculation of DEPS is done with potentially issuable shares that have not yet been issued. Any of the potentially is
that were converted into common stock during the year are excluded because they are included in the calculation of Basic EPS instead

Question - beginning of the yr No pro rate

convertible - CB & CP. Warrants & options
 have been available to CSh divided
uld have been o/s

nd/or Declared (noncumulative)

ed Shares are Converted Into

Any of the potentially issuable shares

tion of Basic EPS instead.
Treasury stock

Treasury stock means the shares which were issued earlier but now have been boug

Repurchased shares It is not an asset of the company,

maybe retired & instead it is a contra stockholder's
return to authorized equity -reduction of the
shares or held as company’s equity.
treasury stock.

Treasury stock = Issued capital

Treasury shares do not Uses/ Reason for buyback - – common shares o/s
receive dividend, do not get ESOP, M&A, Manipulation No: of shares issued - treasury stock
to vote & are not classified as of share prices, etc. = No: of shares O/S If there is
outstanding. treasury stock

Stock Dividend
Dividend paid in shares of the company, provides a return to investors without distributing cash. Implications –
1. Paying of stock dividend -> lower EPS & Book value per share
As a result of dilution of EPS -> MP of share also declines.
3.There is not much change for an individual shareholder after declaration of stock dividend as each shareholder owns more shares (o
MP per share.
4.The total market capitalization of the company is also unchanged.

For eg: 1 stock dividend for every 10 shares owned

If an investor has 100 shares = 10 stock dividend
Total no: of shares investor has after stock dividend is

MP?
TV of equity on B/S?

Stock Split - corporate actions

Stock split is basically splitting or reducing the FV of a share and increasing the no of shares No: of shares *
For eg: 100 shares of 10 each

Stock split -> 2 for 1 split

200 shares of 5 each
reverse split -> 1 for 2
50 shares of 20 each

Stock dividends
Before shares
Investor A 10
Total shares o/s from Co. POV 100
Investor A's ownership 0.1
After stock dividend - 1 share for every 10 shares owned
Investor A 11
Total shares o/s 110
Investor A's ownership 0.1

Stock Subscription

It is a mechanism for allowing employees and investors to consistently purchase s

stock over a long period of time, usually at a lower price

Stock Option
An Employee Stock Option Plan allows employees to purchase company shares at a predetermined price within a specified timeframe after
schedule.
For instance, let’s consider a scenario in a company in 2015. An employee is granted the option to buy 100 shares at the current market value of Rs. 50 p
with 25% of the options vesting each year. After the first year, the employee can exercise options on 25 shares.

Employee Stock Ownership Plan (ESOP)

Consider an Indian manufacturing company, XYZ Industries, implementing an ESOP for its employees. The company establishes an ESOP trust and contributes INR 2,
acquire company shares on behalf of the employees. Rajesh, a full-time employee, receives a share allocation of 100 shares through the ESOP, subject to a four-year v

After completing four years with XYZ Industries, Rajesh’s shares became fully vested. Now, Rajesh decides to exercise his right based on the current market price of sh
Rajesh’s shares to be valued at INR 1,50,000 (100 shares * INR 1,500). It is now dependent on him if he wishes to sell them back to the company or go to the open ma

Warrants

It represents the right to purchase a Co's stcok at a specific price & specific date. It is issued by the

Contingent stock

Contingent stock is stock issuable for little or no cash consideration upon the satisfaction of certain condi
stock agreement (usually associated with business combinations).
w have been bought back by the issuer

older owns more shares (ownership % remains same) at a lower

110

Decrease there are more no: of shares in the market

 No change because transfer from RE -> Paid in Capital

FV Issued capital
ares of 10 each 1000

plit -> 2 for 1 split for every one share, I'll get 2 shares
ares of 5 each 1000
split -> 1 for 2 for every 2 shares that I have -> 1 share
res of 20 each 1000

MP/ MV $ MV of the investment

1 10
1 100

assumption
0.9 9.9
0.9 99

ently purchase shares of a company's

a specified timeframe after the option is granted based on a vesting

urrent market value of Rs. 50 per share. The vesting period spans four years,

SOP trust and contributes INR 2,00,000 to the trust fund. The trust uses this fund to
he ESOP, subject to a four-year vesting period.

on the current market price of shares being INR 1,500 per share. This makes
e company or go to the open market in case the company is publicly traded.

te. It is issued by the company to the investors

ction of certain conditions pursuant to a contingent

1 Cash flow per share should not be reported
2 other comprehensive income or total comprehensive income on per share basis should not be reported
3 Basic EPS and diluted EPS for both income from continuing operations and net income and the effects of
discontinued operations should be reported
4 A reconciliation of the numerators and the denominators of the basic and diluted per-share computations for
income from continuing operations
5 Securities that could potentially dilute basic EPS in the future that were not included in the computation of
diluted EPS because the effect was antidilutive for the period(s) presented.
6 EPS is to be reported by all entities that have issued common stock or potential common stock (that is,
securities such as options, warrants, convertible securities, or contingent stock agreements) if those
securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-
counter market, including securities quoted only locally or regionally.
Market Ratios

1. Book Value per share Assets - Outside liabilities

2. Market Value per share Last traded price of the share Current MP, MP, LTP
3. Face Value per share Capital which is invested by the promoters Par value
RE/ R&S
$100,000 10,000 shares 10
1st year 20000 as profit
Dividend to SH
20000

1. Book Value per share

Formulae 1 C/S + R&S or RE / No: of shares o/s (not weighted) As at B/S date, should not be weigh
Total BV 120000 (10*10000 + 20000)
No: of shares 10000
BV per share 12 $
Formulae 2
Book Value per share = Total Equity SC - preferred equity/ No: of shares o/s
Formulae 3 TA - External Liabilities/ No: of shares
Total Assets 170000
Liabilities 50000
TA - Liabilities 120000
No: of shares 10000
BV per share 12 $
Interpretation Means the amount of capital that the shareholders will receieve when the company liquidates
If assets could be liquidated at their book value and used to repay any liabilities @ book value,
the excess left - equity- would go to shareholders

2. Market to Book ratio Current MP per share Also called PB ratio

Book Value per share
Interpretation Whether Co. is overvalued, undervalued or fairly priced?
Equal to 1 the market and book value are the same, market expectation same as the book value
>1 Market expects abnormally high returns/ earnings and are ready to give more than the book value
<1 Market expects abnormally low returns/ earnings and are ready to give less than the book value
3. Price to Earnings Ratio Current MP per share
PE Ratio Earnings per share

Earnings per share PAT - preferred dividend = EA common SHs

No: of shares

PE ratio indicates the amount of money market is willing to pay for 1$ in Earnings of the company
PE Ratio 10x Expressed in times or multiple of Earnings
Any investor is ready to pay 10 times of the earnings of the share as compared to MP

4. Earnings Yield Earnings per share

Current MP per share
It measures the income-producing power of one share of C/S @ the current MP

5. Dividend Yield Dividend per share 10

Current MP per share 50

6. Dividend Payout Ratio Total Common Dividend 20%

Earnings available to C/S Shs
Earnings available to C/S Shs 100 (=PAT - preferred dividend)
Dividend to C/S Shs 20

7. Retention Ratio 100 - Dividend payout ratio

80%

EARNINGS PER SHARE

 Y1
Assets Liabilities
Cash 30000 Debt 50000
Machinery 80000
FV (never changes) Inventory 35000 Equity 100000 (10000*10)
unless there is a corporate AR 25000 RE (Y1) 20000
action Treasury stock, Acc OCI

170000 170000

s at B/S date, should not be weighted for the year

TE = C/S E + PE

e company liquidates
abilities @ book value,

he book value Fairly priced

more than the book value Overvalued
ess than the book value Undervalued
multiple of Earnings

20%

=PAT - preferred dividend)

Profitibility Ratio

Income Statement

Sales/ Revenue from operations

less: COGS COGS 100- GP ratio
Gross Profit GP ratio GP/ sales *100
less: operating expenses
Add: Operating Income
Operating Profit/ EBIT Operating Profit ratio EBIT/ Sales *100
less: non operating expenses (interest)
add: non operating income
less: tax
Net Income/ EAT/ PAT/ Net Income ratio NI/ Sales*100

ROI or ROA

Return on Invested capital is a generic term for ROA or ROE

CMA perspective
1. ROI Net profit/ Assets

2. ROA NI/ Average assets

Avg assets = (Opening + Closing) / 2

Du pont model Net Profit ratio * Asset Turnover ratio

NI X Sales
Sales Avg TA

3. ROE NI - preferred dividend/ Average equity

Avg equity = (Opening + Closing) / 2

Du pont model ROA * Finacial leverage ratio/ Equity Multiplier

1 NI X Avg TA
Avg TA Avg Equity
2 NI X Sales X
Sales Avg TA
100
65
35
Avg TA
Avg Equity
Sales growth requires cash.
The company must pay additional up-front costs before the cash from the increased sales begins to co

• Increased inventory on hand needed to support the growth in sales.

• Increased payroll costs due to hiring additional employees.
• Increased accounts receivable due to the increased sales.
• Investments in additional fixed assets such as manufacturing equipment to enable increased produ

The needed cash can be generated internally by retaining profits in the company, or it can be ge

The sustainable equity growth rate (also called the sustainable growth rate) is the rate at which the co
each year without the company’s needing to increase its current level of external financing. It is the g
can fund internally through retention of its profits

Payment of dividends decreases the amount of a company’s retained earnings. In assessing equity g
made that a portion of earnings is retained, and a portion is paid out in dividends, and that th
constant.

Two sources of internal growth are used in calculating the sustainable equity growth rate:
1) Earnings retained
2) Return earned on those earnings retained.

Income available to common shareholders is net income minus preferred dividends if the company ha

If the company has preferred stock, common equity is total equity minus preferred stock. Averages of
averaging the beginning and ending balances. Therefore, average common equity is the average of (b
stock) and (ending total equity minus ending preferred stock).
 eased sales begins to come in. The up-front costs may include:

enable increased production to support the sales growth.

ompany, or it can be generated by receiving external financing.

the rate at which the company’s sales can grow

rnal financing. It is the growth rate that the company

gs. In assessing equity growth, the assumption is

n dividends, and that the dividend payout is

growth rate:

dends if the company has preferred stock.

erred stock. Averages of balance sheet items are usually calculated by

quity is the average of (beginning total equity minus beginning preferred
1 Dividend Payout Ratio
`=Common Dividends/ Earnings available to equit SH's
2 Dividend Yield
`=Annual Dividends per share/MP of the share
3 Earnings yield
=EPS per share/ MP per share
4 Book Value per share
=Total equity - Preferred equity/ No: of common shares o/s
`=Net Assets (A-L)/ No: ofcommon shares o/s
5 Market to book ratio or PB ratio
`=MP/ Book value per share
6 Price Earnings Ratio
`=MP/ EPS