Book Value Per Share and Earnings Per Share Book Value Per Share

BOOK VALUE PER SHARE AND EARNINGS PER SHARE
BOOK VALUE PER SHARE

The amount that would be paid on each share assuming the company is liquidated and the
amount available to shareholders is exactly the same as the amount reported as shareholders’
equity.
Formula to compute book value per share:
1. When there is only one class of share
BVPS= Total shareholders’ equity excluding subscription receivable/ Number of shares
outstanding
Note: Subscription receivable shall not be deducted from the subscribed share capital because
under the corporation code, whenever there is a corporate liquidation, subscription receivable
must be paid by the subscriber to be used as payment of liabilities.
2. When there is more than one class of share
BVPS of preference share= Preference shareholders’ equity/ Number of preference shares
outstanding
BVPS of ordinary share= Ordinary shareholders’ equity/ Number of ordinary shares
outstanding
PREFERENCE SHARE
The preference share may be preferred as to:
1. Assets (Liquidating dividend)
The preference share is entitled not only to the liquidating dividend value but also to
dividends in arrears.
Note: Preference share that is preferred as to asset is a quasi-liability with respect to its
fixed interest. It is entitled to dividends in arrears upon liquidation regardless whether the
accumulated profits have a positive or negative balance.
2. Dividends
The preference share has the right to receive dividend first before any dividend is given
to the ordinary shares. If the excess over par is negative brought about by negative
retained earnings or deficit, the deficit will then be allocated on prorate basis between the
ordinary shares and preference shares based on their total par value or stated value.
The dividend right may be:

A. Non-cumulative
B. Cumulative
C. Non-participating
D. Participating
If the problem is silent: Non-cumulative and non-participating.
Non-cumulative vs. Cumulative
Non-cumulative preference share is one on which the right to receive dividends is forfeited in
any one year in which dividends are not declared. Thus, the preference share is entitled only to
the current year dividends.
On the other hand, cumulative preference share is one which any undeclared dividends
accumulate each year until paid.
Non-participating vs. participating
Non-participating preference share is one that is entitled to receive only the dividend equal to the
fixed rate, whereas participating preference share is one which is entitled to receive dividends in
excess of the basic or fixed rate. It may be:
A. Fully participating
B. Participating only to a certain amount of percentage.
But before the participation, the ordinary shares must receive a dividend equal to the basic rate of
the preference share multiplied by the total par or stated value of the ordinary shares for one
year.
More than one class of preference shares with varying rates- the ordinary share shall receive first
an amount equal to the total par or stated value of the ordinary share multiplied by the rate of the
preference shares having the lowest rate before the balance for participation.
Procedural approach
The following procedures are performed in calculating book value per share when there are two
or more classes of shares.
1. Compute the number of shares outstanding and the total par or stated value of outstanding
shares for each class of stock.
2. Compute the total shareholders’ equity excluding any subscriptions receivable.
3. Compute for the preference shareholders’ equity.
Preference dividends may be computed as follows:
 For cumulative preference share
Liquidating dividends= Fixed rate x total par value of PS x number of years dividends are
in arrears (dividends in arrears include all undeclared dividends in the past years and
current year)
 For non-cumulative preference shares

Liquidating dividends= Fixed rate x total par value of preference shares x 1 year
Amount of participation for preference shares may be computed as follows:

Total shareholders’ equity excluding subscriptions receivable xx
Less: Total par or stated values of the PS xx
Total par or stated value of the OS xx
Preference dividends xx
Ordinary share dividends (Basic rate of PS x total par value xx
of OS x 1 year)
Balance for participation xx
Amount of participation of PS (balance for participation x total par value

of PS/aggregate par value of PS and OS) xx
Amount of participation of OS (balance for participation x total par value
of OS/aggregate par value of PS and OS) xx
4. Using residual entity approach, compute for the total ordinary shareholders’ equity by
deducting the total shareholders’ equity by deducting the total shareholders’ equity minus
preference shareholders’ equity.
5. Compute for the book value per share of the preference shares and ordinary shares.
Tabular approach
1. Compute for the outstanding shares and total par value of the outstanding shares for each
class of share using this formula:
Share capital issued xx
Add: Subscribed share capital xx
Total xx
Less: Treasury shares xx
Outstanding shares xx
Multiply by: Par value per share xx
Total par value of outstanding shares xx
2. Compute for the excess of par using this formula:

Total shareholders’ equity excluding subscriptions receivable xx
Less: Total par value of the preference shares xx
(Outstanding shares x par value)
Total par value of the ordinary shares xx
(Outstanding shares x par value)
Excess over par xx
3. Use the following table in computing for the book value per share:
NON-PARTICIPATING
Excess over par Preference Ordinary
Shares Shares
Balances Pxx Pxx Pxx
Liquidation value ((Liquidation
value – par value) x outstanding
PS) (xx) xx
Preference dividends (xx) xx
Balance to ordinary shares Pxx xx
Total shareholders’ equity Pxx Pxx
Divide by: Outstanding shares xx xx
BVPS Pxx Pxx
Preference dividends may be computed as follows:
 For cumulative preference share
Liquidating dividends= Fixed rate x total par value of PS x number of years dividends are
in arrears (dividends in arrears include all undeclared dividends in the past years and
current year)
 For non-cumulative preference shares

Liquidating dividends= Fixed rate x total par value of preference shares x 1 year.
PARTICIPATING
Shares Shares
Balances Pxx Pxx Pxx
Liquidation value ((Liquidation
value – par value) x outstanding
PS) (xx) xx
Preference dividends (xx) xx
Ordinary shares dividends (xx) xx
Balance for participation Pxx
PS (balance for participation x (xx) xx
total par value of PS/
aggregate par value) ***
OS (balance for participation x
total par value of OS/
aggregate par value) xx xx
Total shareholders’ equity Pxx Pxx
Divide by outstanding shares xx xx
BVPS Pxx Pxx
***For fully participating
For partial participation, amount of participation is equal to:
Percentage of participation minus fixed rate of PS xx
Multiply by: Total par value of preference share xx
Amount of participation xx
ILLUSTRATION: BOOK VALUE PER SHARE (COMPREHENSIVE)
The shareholders’ equity of COVID Corporation on December 31, 2019 shows the following
balances:
Preference share, 12% P100 par 8,000 shares P800,000
Subscribed preference share 200,000
Subscription receivable- preference 50,000
Ordinary share, P100 41,000 shares issued 4,100,000
Treasury shares- ordinary (1,000 shares) 150,000
Share premium 2,000,000
Retained earnings 4,000,000
Dividends have been paid on the preference shares up to December 31, 2017.
Required:
Determine the amount of BVPS of OS and PS under each of the following conditions with
respect to preference shares:
A. Noncumulative, nonparticipating
B. Cumulative, nonparticipating
C. Cumulative, fully participating
D. Cumulative and participating up to 18%
E. Cumulative and nonparticipating (the preference share has a liquidation value of P110 per
share)
SOLUTION:
Please refer to the steps previously discussed
A. NONCUMULATIVE, NONPARTICIPATING
STEP 1:
Preference shares: Shares Total par value
Preference share capital issued 8,000 P800,000
Add: Subscribed preference share 2,000 200,000
Total 10,000 1,000,000
Less: Treasury shares at par - -
Shares outstanding and total par value 10,000 P1,000,000
Ordinary shares Shares Total par value
Ordinary share capital issued 41,000 P4,100,000
Add: Subscribed ordinary shares - -
Total 41,000 4,100,000
Less: Treasury shares at par 1,000 100,000
Shares outstanding and total par value 40,000 4,000,000
STEP 2
Preference share, 12% P100 par 8,000 shares P800,000
Subscribed preference share 200,000
Ordinary share, P100 41,000 shares issued 4,100,000
Treasury shares- ordinary (1,000 shares) (150,000)
Share premium 2,000,000
Retained earnings 4,000,000
Total shareholders’ equity P10,950,000
STEP 3
Par value of preference shareholders’ equity P1,000,000
Add: Preference dividends (P1M x 12% x 1 year) 120,000
Liquidation premium -
Total preference shareholders’ equity P1,120,000
STEP 4
Less: Preference shareholders’ equity 1,120,000
Total ordinary shareholders’ equity 9,830,000
STEP 5
Divided by: Outstanding shares 10,000
BVPS- PS P112
Total ordinary shareholders’ equity P9,830,000

BVPS- OS P245.75
ALTERNATIVE SOLUTION (TABULAR)
STEP 1
This was already computed in the previous solution.
STEP 2
Total shareholders’ equity excluding subscriptions receivable P10.950,000
Less: Par value of the preference shares 1,000,000
Par value of the ordinary shares 4,000,000
Excess over par P5,950,000
STEP 3
Shares Shares
Balances P5,950,000 P1,000,000 P4,000,000
Preference dividends (1Mx12%x1) (120,000) 120,000
Balance to ordinary shares P5,830,000 5,830,000
Total shareholders’ equity P1,120,000 P9,830,000
Divide by: Outstanding shares 10,000 40,000
BVPS P112 P245.75
B. CUMULATIVE, NONPARTICIPATING
Steps 1 and 2 are similar with computation in requirement A.
STEP 3
Add: Preference dividends (P1M x 12% x 2 years) 240,000
STEP 4
STEP 5
BVPS- PS P124

BVPS- OS P242.75
ALTERNATIVE SOLUTION (TABULAR)

Steps 1 and 2 are similar with computation in requirement A for alternative solution portion.
STEP 3
Shares Shares
Balances P5,950,000 P1,000,000 P4,000,000
Balance to ordinary shares P5,710,000 5,710,000
Divide by: Outstanding shares 10,000 40,000
BVPS P124 P242.75
C. CUMULATIVE, FULLY PARTICIPATING
STEP 3
*Amount of participation of preference share 1,046,000
*Amount of participation for PS may be computed as follows:

Preference dividends 240,000
Ordinary share dividends (4M x12%x 1 year) 480,000
Balance for participation 5,230,000
Before participation, the ordinary share shall receive first an amount equal to the total par or
stated value of the ordinary share multiplied by the rate of the PS (lowest rate if there are two or
more preference shares).
Par value of outstanding shares Amount of participation

Preference shares P1,000,000 P1,046,000
Ordinary shares 4,000,000 4,184,000
Totals P5,000,000 P5,230,000
STEP 4
STEP 5
BVPS- PS P228.6

BVPS- OS P216.6
ALTERNATIVE SOLUTION
STEP 3
Shares Shares
Balances P5,950,000 P1,000,000 P4,000,000
Ord. shares dividends (4Mx12%x1) (480,000) 480,000
Balance for participation P5,230,000
PS (1/5 x 5,230,000) (1,046,000) 1,046,000
OS (4/5 x 5,230,000) 4,184,000 4,184,000
Divide by outstanding shares 10,000 40,000
BVPS P228.6 P216.6
1. CUMULATIVE AND PARTICIPATING UP TO 18%

STEP 3
*Amount of participation of preference share 60,000
*Amount of participation for PS may be computed as follows:

Preference dividends 240,000
Ordinary share dividends (4M x12%x 1 year) 480,000
Balance for participation 5,230,000
Amount of participation to PS
(18%-12%) x 1,000,000 P60,000
STEP 4
STEP 5
BVPS- PS P130

BVPS- OS P241.25
STEP 3
Shares Shares
Balances P5,950,000 P1,000,000 P4,000,000
Ord. shares dividends (4Mx12%x1) (480,000) 480,000
Balance for participation P5,230,000
PS (1/5 x 5,230,000) (60,000) 60,000
OS (4/5 x 5,230,000) 5,170,000 5,170,000
BVPS P130 P241.25
2. CUMULATIVE AND NONPARTICIPATING (THE PREFERENCE SHARE HAS

A LIQUIDATION VALUE OF P110 PER SHARE)
STEP 3
Liquidation premium ((110-100)x 10,000 100,000
STEP 4
STEP 5
BVPS- PS P134

BVPS- OS P240.25
STEP 3
Shares Shares
Balances P5,950,000 P1,000,000 P4,000,000
Liq. Premium ((110-100)x1,000) (100,000) 100,000
Balance to ord. shares P5,610,000 P5,610,000
BVPS P134 P240.25
EARNINGS PER SHARE

Earnings per share (EPS) is the amount attributable to every share of ordinary share outstanding
during the period. Thus, the earnings per share information pertain only to ordinary share.
Earnings per share is not computed for preference share because there is a fixed rate of return for
such share.
Types of Earnings per Share
1. Basic earnings per share
2. Diluted earnings per share
Computation of basic earnings (or loss) per share
Basic EPS= Net income (or loss) minus preference dividends/ Weighted average ordinary shares
outstanding
 The basic earnings per share is calculated by dividing the profit or loss (after income tax
expense) for the period attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period.
Note: If the problem is silent, the net income given is already after income tax expense.
 Profit or loss for the period attributable to ordinary shareholders should be the P/L for the
period after deducting dividends on the preference shares.
 If the preference shares are non-cumulative, only the preference dividends declared
during the period are deducted.
 If the preference shares are cumulative, the full amount of preference dividends for the
current period, whether declared or not, should be deducted from profit in arriving at the
profit or loss attributable to ordinary shareholders.
 Basic loss per share

 The amount of net loss is a negative amount. In effect, the preference dividends is
added to the net loss.
 The basic loss per share is also a negative amount and still required to be
disclosed.
 The weighted average number of shares outstanding during the period constitutes the
basis for the per share amounts reported.
ILLUSTRATION:
Lockdown, Inc. has the following changes in its ordinary shares outstanding for the year.
Date Share Changes Shares Outstanding

Jan. 1 Beginning balance 90,000
Apr. 1 Issued 30,000 shares for cash 30,000
July 1 Purchased 39,000 shares as treasury (39,000)
Nov. 1 Issued 60,000 shares for cash 60,000
Dec. 31 Ending balance 141,000
Computation of weighted average number of shares outstanding:

90,000 x 12/12 90,000
30,000 x 9/12 22,500
39,000 x 6/12 (19,500)
60,000 x 2/12 10,000
Weighted average shares 103,000
Alternative computation:
90,000 x 3/12 22,500
120,000 x 3/12 30,000
81,000 x 4/12 27,000
141,000 x 2/12 23,500
Share bonus (share dividends) and share splits

 When share bonus (or stock dividends) and share split is declared during the period, the
additional shares are considered outstanding at the beginning of the earliest year or at the
date of the issuance of the related shares, whichever comes later.
ILLUSTRATION:
Date Share Changes Shares Outstanding
Jan. 1 Beginning balance 100,000
March 1 Issued 20,000 shares for cash 20,000
July 1 Purchased 30,000 shares as treasury (30,000)
August 1 Issued 45,000 additional shares
In a 50% bonus issue 45,000
Nov. 1 Issued 30,000 shares for cash 30,000
Dec. 31 Ending balance 165,000
Computation of weighted average number of shares outstanding:

100,000 x 12/ 12 x 1.5 150,000
20,000 x 10/12 x 1.5 25,000
30,000 x 6/12 x 1.5 (22,500)
30,000 x 2/12 5,000
Alternative computation:
100,000 x 2/12 x 1.5 25,000
120,000 x 4/12 x 1.5 60,000
90,000 x 1/12 x 1.5 (11,250)
135,000 x 3/12 33,750
165,000 x 2/12 27,500
ILLUSTRATION: BASIC EARNINGS OR LOSS PER SHARE

Extended Corporation had 100,000 ordinary shares outstanding on December 31, 2019.
Required:
1. Compute for Extended’s BEPS under the following independent scenarios
assuming net income for 2019 was P2,000,000.
A. There are no preference shares issued.
B. Extended issued 20,000 shares of 10%, P100 par, cumulative,
preference shares.
C. Extended issued 20,000 shares of 10%, P100 par, noncumulative
preference shares. Also, Extended declared dividends on the
preference shares amounting to P300,000 in 2019.
2. Compute for Extended’s basic loss per share under the following
independent scenarios assuming net loss for 2019 was P2,000,000.
A. There are no preference shares issued.
B. Extended issued 20,000 shares of 10%, P100 par, cumulative,
preference shares.
C. Extended issued 20,000 shares of 10%, P100 par, noncumulative
preference shares. Also, Extended declared dividends on the
preference shares amounting to P300,000 in 2019.
SOLUTION:
1. BEPS
A. BEPS= [(2M - 0)/100,000]= P20 per share
B. BEPS= [2M – (20,000 x 10% x 100)]/100,000= P18 per share
C. BEPS= [(2M – 300,000)/100,000]= P17 per share
2. BLPS
A. BLPS= [(-2M - 0)/100,000]= (P20) per share
B. BLPS= [-2M – (20,000 x 10% x 100)]/100,000= (P22) per share
C. BLPS= [(-2M – 300,000)/100,000]= (P23) per share
DILUTED EARNINGS PER SHARE

Diluted EPS is the amount attributable to every share of ordinary share outstanding
during the period while giving effect to all dilutive potential ordinary shares outstanding during
the period.
The reduction in earnings per share or an increase in loss per share resulting from the assumption
that convertible instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of specified conditions is termed dilution.
Important notes to EPS determination:
 Months outstanding:
1. Start of the accounting period or date of issuance whichever is later up to
the reporting date.
2. If the bonds were converted during the year, the months outstanding for
the purposes of computation of the weighted average assumed ordinary
shares issued as a result of the conversion of the bonds would be from the
start of the year or date of issuance, whichever is later up to the reporting
period.
 For purposes of computing the basic EPS the weighted average outstanding ordinary
shares is equal to the total weighted average of actual ordinary shares issued.
 For purposes of computing the diluted EPS the weighted average outstanding ordinary
shares is equal to the total weighted average of outstanding ordinary shares.
Dilutive Potential Ordinary Shares

A potential ordinary share is a financial instrument or other contract that may entitle its holder to
ordinary shares.
Potential ordinary share shall be treated as dilutive when, and only when, their conversion to
ordinary shares would decrease earnings per share or increase loss per share from continuing
operations.
Examples of potential ordinary shares are:
1. Financial liabilities or equity instruments (e.g. convertible bonds and convertible
preference shares);
2. Options and warrants; and
3. Shares that would be issued upon the satisfaction of conditions resulting from
contractual arrangements, such as the purchase of a business or other assets.
If-Converted Method
The “if-converted method’ is used to account for the dilutive effects of potential
conversion of convertible securities. This method assumes that the conversion takes place on the
first day of the current reporting period or the date of issuance if the security was issued during
the current reporting period.
Convertible Bonds Payable
Convertible bonds are dilutive whenever interest (net of tax and other changes in income or
expense) per ordinary share obtainable on conversion is lesser than the basic earnings per share.
Determination of Diluted EPS
In case of bonds convertible into ordinary shares, diluted earnings per share shall be computed as
follows:
Diluted EPS= Net income plus interest expense, net of tax/ Weighted average ordinary shares
outstanding
Weighted average shares:
Beginning balance x 12/12 xx
Add: Any actual issuance during the year x months outstanding /12 xx
Total weighted average of actual ordinary shares issued xx
Add: Assumed ordinary shares issued as a result of conversion of
bonds x months outstanding/ 12 xx
Total weighted average shares xx
ILLUSTRATION: CONVERTIBLE BONDS PAYABLE

At the beginning of 2019, Inip Company has 100,000 outstanding ordinary shares. On April 1,
2019, Inip issued 10%, 4,000, P1,000 convertible bonds for P3,756,920. The prevailing interest
of the bonds is 12% and the principal amount is due on April 1, 2023. Interest is payable every
April 1. The bonds are convertible into 20,000 ordinary shares. Net income for 2019 was
P5,000,000. The net income tax rate is 30%.
Required: Compute for the BEPS and DEPS for 2019.
SOLUTION:
BEPS = P5,000,000/100,000= P50 per share
DEPS= [P5,000,000+(338,123*x 70%**)]
115,000 shares***
= P45.54 per share
* 4,000,000 x 10% x 9/12

**1-30%
***Calculation of weighted average ordinary shares
Weighted average of actual ordinary shares 100,000
Add; Issuance of shares related to conversion
(4,000 x 5 x 3/12) 5,000
Total weighted average of actual OS issued 105,000
Add: Assumed converted OS x mos. Outstanding
(4,000 x 5 x 9/12) 15,000
Total weighted ave. outstanding OS 120,000
CONVERTIBLE PREFERENCE SHARES
Convertible preference shares are dilutive whenever the amount of dividend on such shares
declared in or accumulated for the current period per ordinary share obtainable on conversion is
lesser than the basic EPS.

In case of preference shares convertible into ordinary shares, diluted earnings per share shall be
computed as follows:
Diluted EPS= Net income before deducting preference dividends/ Weighted average ordinary
shares outstanding
Weighted average shares:
Beginning balance x 12/12 xx
Add: Any actual issuance during the year x months outstanding /12 xx
Total weighted average of actual ordinary shares issued xx
Preference share x months outstanding/ 12 xx
Total weighted average shares xx
ILLUSTRATION: CONVERTIBLE PREFERENCE SHARES

At the beginning of 2019, Online Company has 100,000 outstanding ordinary shares. On April 1,
2019, Online issued 10% P4,000,000, cumulative and convertible preference shares for
P4,200,000. The preference shares are convertible into 20,000 ordinary shares. Net income for
2019 was P5,000,000. The income tax rate is 30%.
Required: Compute for the BEPS and DEPS for 2019.
BEPS=P5,000,000 – (4,000,000 x 10%)

100,000 shares
BEPS= P46 per share
DEPS= 5,000,000/115,000 shares*= P43.48 per share
*
Total weighted average of actual ordinary shares issued 100,000
Preference share (20,000 x 9/12) 15,000
Total weighted average shares 115,000
OPTIONS AND WARRANTS

Options and warrants are dilutive when they would result in the issue of ordinary shares for less
than the average market price of ordinary shares during the period.
Options and warrants have dilutive effect only when the average market price of ordinary shares
during the period exceeds the exercise price of the options or warrants.

For the purpose of calculating diluted earnings per share, an entity shall assume the exercise of
dilutive options and warrants of the entity.
The assumed proceeds from these instruments shall be regarded as having been received from
the issue of ordinary shares at the average market price of ordinary shares during the period. This
is also known as treasury shares method.
The difference between the number of ordinary shares issued and the number of ordinary shares
that would have been issued at the average market price of ordinary shares during the period
shall be treated as an issue of ordinary shares for no consideration.
PROCEDURAL APPROACH
Diluted EPS to be computed will vary depending whether or not the options or warrants are
exercised. The following shows the different steps in identifying diluted EPS:
A. OPTIONS OR WARRANTS ARE NOT EXERCISED.

1. Compute for the total exercise price using the following formula:
Exercise price xx
Add: Fair value of each share option xx
Total exercise price xx
2. Compute for the assumed treasury shares using the following formula:
Option shares xx
Multiply by: Total exercise price xx
Proceeds from assumed exercise of options xx
Divided by: Average market price during the year xx
Assumed treasury shares xx
3. Compute for the incremental shares using the following formula:

Option shares xx
Less: Assumed treasury shares xx
Incremental shares xx
4. Compute for the weighted average incremental shares using the following formula:
Multiply by: Months outstanding/12 xx
Weighted average incremental shares xx
Note: Months outstanding shall be from the later between the start of the year and the
date of issuance up to the reporting date.
5. Compute for the total weighted averages of outstanding ordinary shares using the
following formula:
Weighted average of actual shares issued xx
Add: Weighted average of incremental shares xx
6. Compute for the diluted EPS using the following formula:

DEPS= Net income minus preference dividends/ Weighted average OS outstanding
B. OPTIONS OR WARRANTS ARE EXERCISED

Procedures are similar with that of procedures performed when options and warrants are not
exercised except for the following items:
1. Computation of the assumed treasury shares

Option shares xx
Multiply by: Total exercise price xx
Proceeds from assumed exercise of options xx
Divided by: Market price at the date of conversion xx
Assumed treasury shares xx
2. Computation of the weighted average incremental shares
Multiply by: Months outstanding/12 xx
Note: Months outstanding shall be from the later between the start of the year and the
date of issuance up to the exercise price.
3. Computation of the total weighted averages of outstanding ordinary shares

Weighted average of actual shares issued* xx
Add: Weighted average of incremental shares xx
*This shall include the weighted average of actual shares issued from the exercise of
the options or warrants. Months outstanding shall be from date of exercise up to date
of reporting.
ILLUSTRATION: OPTIONS AND WARRANTS

Pray Ka Lang Co. has the following data for the year 2019:
Net Income P5,000,000
Outstanding shares, Jan. 1 100,000
Employee share options outstanding during the year:

Option shares 20,000
Exercise price P180
Fair value of each option 20
Average market price 250
Ending market price at year-end 300
Required:
1. Determine the amount of basic EPS for the year.
2. Determine the amount of diluted EPS under each of the following scenarios
A. Options were issued on January 1, 2019 and there were no exercise of options
made during the year.
B. Options were issued on April 1, 2019 and there were no exercise of options
made during the year.
3. Determine the amount of basic EPS and diluted EPS assuming options were issued in
the previous year and were exercised on October 1, 2019 when the market price of the
ordinary shares was P250.
SOLUTION:
1. BEPS = P5,000,000/ 100,000 = P50 per share

2. Diluted EPS
A. DEPS = P5,000,000/ 104,000 shares* = P48.08 per share
*
Weighted average of actual shares issued 100,000
Add: Weighted average of incremental shares
From assumed exercise of options
(4,000 x 12/12) 4,000
Weighted average of ordinary shares 104,000
Note: Months outstanding for assumed exercise of options is 12 months, which is
from date of issuance up to the reporting date.

Multiply by: Total exercise price 200
Proceeds from assumed exercise of options 4,000,000
Divided by: Average market price during the year 250
Assumed treasury shares 16,000

Less: Assumed treasury shares 16,000
Incremental shares 4,000
B. DEPS = P5,000,000/ 103,000 shares* = P48.54 per share
*
(4,000 x 9/12) 3,000
Note: Months outstanding for assumed exercise of options is 9 months, which is from
date of issuance up to the reporting date.
3. BEPS = P5,000,000/ 105,000* = P47.62 per share
*
Add: Weighted average of shares issued from exercise
Of options (20,000 x 3/12) 5,000
Total weighted average of ordinary shares 105,000
Diluted EPS
DEPS = P5,000,000/ 108,000 shares* = P46.3 per share
*
(4,000 x 9/12) 3,000
Note: Months outstanding for assumed exercise of options is 9 months, which is from
date of issuance up to the exercise date.
MULTIPLE POTENTIAL DILUTIVE SECURITIES

In case there are two or more dilutive securities, it is necessary to rank the dilutive potential
diluters from the most dilutive to the least dilutive. Options, warrants, or rights are usually rank
first and then for the convertible bonds payable and convertible preference shares rank it based
from the lowest incremental earnings per share to the highest.
If the potential diluters are anti-dilutive, disregard the earnings per share computation.
PROCEDURAL APPROACH
1. Compute for the BEPS.
2. Check for the initial test dilution using the following summarized rules:
For options and warrants
Dilutive: Exercise price is less than the average market price.
Antidilutive: Exercise price is more than the average market price.
For convertible preference shares

Probably dilutive if the incremental EPS is less than the basic EPS. Incremental EPS
is computed as follows:
Incremental EPS= Preference dividends/ Weighted average potential ordinary shares
For convertible bonds payable

Probably dilutive if the incremental EPS is less than the basic EPS. Incremental EPS
is computed as follows:
Incremental EPS= Interest expense (net of tax)/ Weighted average potential ordinary
shares
3. Rank the dilutive potential diluters from the most dilutive to the least dilutive. The
basis of ranking is that the lowest incremental EPS is the most dilutive. However, if
the options and warrants are dilutive, they usually rank first among the potential
diluters.
4. Include potentially dilutive convertible securities one by one. Every time an item is
included, calculate new earnings per share or loss per share amount.
Continue selecting and applying the convertible securities until such time that the
next security in the list has EPS amount greater than the last computed EPS (or when
the new loss per share amount less than the last computed loss per share).
When the next item has greater EPS amount, stop the process at that point. All other
succeeding securities in the list are considered antidilutive for purposes of computing
the lowest possible diluted EPS figure.
ILLUSTRATION: MULTIPLE POTENTIAL DILUTIVE SECURITIES

Stay Safe Co. has the following data for the year 2019:
Net income from continuing operations P1,500,000
Net income from discontinued operation 300,000
OCI 600,000
Total comprehensive income 2,400,000
Furthermore, below is the list of securities issued by Stay Safe.
Type of security Par or face value Description Conversion terms

Ordinary shares P100 100,000 shares None
10% convertible PS P100 50,000 shares 2 shares of ordinary for each
PS
10% convertible P1,000 P1,000,000 40 shares of ordinary for each
Bonds P1,000 bond.
Additional information:
 All securities had been issued in the previous period.
 The bonds payable are issued at face amount.
 Stay Safe had 10,000 share options outstanding on January 1, 2019. The option has an
exercise price and average market price of P150 and P200, respectively.
 The tax rate for 2019 is 30%.
Required: Compute for the basic and diluted earnings per share.
1. From continuing operations
2. From discontinued operations
SOLUTION
1. BEPS=1,500,000 – (50,000 X 100 X 10%)
100,000
BEPS= P10 per share.
Diluted EPS
Initial test of dilution
A. Options
Dilutive. The exercise price (P150) is less than the average market price (P200).
B. Convertible preference shares
Probably dilutive. The incremental EPS (P5) is less than the basic EPS (P10).
Incremental EPS= (5,000,000 x 10%)
(50,000 x 2)
Incremental EPS= P5 per share.
C. Probably dilutive. The incremental EPS (P1.75) is less than the basic (P10).
Incremental EPS= (1,000,000 x 10%) x (1-30%)
(1,000,000/1,000) x 40
Incremental EPS= P1.75 per share.
Ranking
1st Options
2nd Convertible bonds
3rd Convertible PS
Profit Ordinary Shares EPS

BEPS from continuing operations *1,000,000 100,000 10
Options 0 2,500
Total 1,000,000 102,500 9.76
Convertible bonds payable 70,000 40,000
Total 1,070,000 142,500 7.51
Convertible PS 500,000 100,000
Total 1,570,000 242,500 6.47
*Net income less preference dividends [(1.5M – (50,000 x 100 x 10%)]
Answer: the final diluted EPS would be 6.47 per share.
2. From discontinued operations

BEPS=300,000/100,000
BEPS= P3 per share
DEPS= 300,000/242,500
DEPS= P1.24 per share
Important note: The weighted average outstanding shares should be the denominator in the
computation of the final diluted per share from income from continuing operations.
DILUTED LOSS PER SHARE
In case of net loss arising from continuing operations, determination of diluted loss per share is
not performed since potential ordinary share are considered as anti-dilutive.
In any case given, the diluted loss per share will always be greater than basic loss per share.
On the other hand, in the case of loss arising from discontinued operations, determination of
diluted loss per share is applicable or may be reported.
SUMMARY:
 For income from continuing operations, there is no such thing as diluted loss per share.
 For income from discontinued operations, diluted loss per share may be reported.
 For other comprehensive income, determination of basic and diluted EPS is
inappropriate.
RIGHTS ISSUE
The issue of ordinary shares at the same time of exercise or conversion of potential ordinary
shares does not usually give rise to a bonus element. This is because the potential ordinary shares
are usually issued for fair value, resulting in a proportionate change in the resources available to
the entity.
In a rights issue, however, the exercise price is often less than the fair value of the shares.
Therefore, such a rights issue includes a bonus element, which will later have an effect to EPS
computation.
Determination of ordinary shares for EPS computation:

If a rights issue is offered to all existing shareholders, the number of ordinary shares to be used
in calculating the basic and diluted EPS for all periods before the rights issue is as follows:
Outstanding ordinary Fair value per share before the exercise of

Shares before rights = rights
Issue Theoretical ex-rights fair value per share
Note: The item multiplied to outstanding share before rights issue is termed as adjustment factor.
*Calculation of theoretical ex-rights fair value per share

Fair value of ordinary shares outstanding (outstanding shares
Before rights issue x fair value per share-rights on**) xx
Add: Proceeds from exercise of rights (shares issued through
Exercise of rights x exercise price) xx
Total: xx
Divided by: Outstanding shares after rights issue xx
Theoretical ex-rights fair value per share xx
**Fair value of the share immediately prior to the exercise of rights
Alternatively, it may also be computed as follows:
Market value of share right on minus subscription price

Number of rights to purchase one share plus 1 = Value of one right
Then, theoretical ex-rights fair value per share would be:
Fair value per share- right on xx
Less: Theoretical value of one right xx
Theoretical ex-rights fair value per share xx
PROCEDURES FOR EPS CALCULATION

For the purpose of calculating basic and diluted EPS, the following procedures are performed.
1. Compute for the theoretical fair value of share ex-right.
2. Compute for the adjustment factor.
3. Compute for the weighted average of ordinary shares to be used in calculating EPS.
A. For all periods prior to the right issue
Ordinary shares outstanding- actual xx
Multiply by: Adjustment factor xx
Adjusted ordinary shares outstanding xx
Multiply by: Months outstanding/ 12 xx
Weighted average outstanding ordinary shares* xx
*If the rights issue were exercised during the year, add the weighted average
outstanding shares on the ordinary shares issued (shares issued through exercise of
rights x months outstanding/12)
B. For all periods after the rights issue.

Ordinary shares outstanding- actual xx
Multiply by: Months outstanding/ 12 xx
Weighted average outstanding ordinary shares xx
ILLUSTRATION:
The adjusted net income of Stay At Home Company for the years, 2017, 2018 and 2019
amounted to P1,008,000, P1,237,500 and P1,750,000, respectively.
Additional information:
Ordinary shares outstanding prior to rights issue 20,000
Rights issue during 2017 (one new ordinary share for
Every 4 shares held) 5,000
Date of exercise of rights April 1, 2018
Fair value of share immediately prior to exercise
Of rights (Fair value of share right-on) P120
Exercise or subscription price 20
Required: Determine the basic earnings per share for years 2017, 2018 and 2019.
SOLUTION:
Fair value of ordinary shares outstanding (20,000 x 120) P2,400,000

Add: Proceeds from exercise of rights (5,000 x 20) 100,000
Total: 2,500,000
Divided by: Outstanding shares after rights issue 25,000
Theoretical ex-rights fair value per share P100
OR
Fair value per share- right on P120
Less: Theoretical value of one right* 20
Theoretical ex-rights fair value per share P100
*[(120-20)/(4+1)] = P20 per right
Adjustment factor = (120/100)= 1.2
2017:
Weighted average outstanding shares
(20,000x1.2x 12/12) 24,000
BEPS= 1,008,000/24,000= P42 per share.
2018:
(20,000x1.2x 3/12) 6,000
(20,000+5,000) x 9/12 18,750 24,750
BEPS= 1,237,500/24,750= P50 per share.
2019:
(20,000+5,000) x 12/12 25,000
BEPS= 1,750,000/25,000= P70 per share
EXERCISE II (SOLUTION AND ANSWER)

PROBLEM NO. 1
1. P1,904,000
Jan 1 P800,000
Jan 15 960,000
Mar 10 (120,000)
May 15 (40,000)
June 10 68,000
Dec 31 (80,000)
Dec 31 316,000
Total SHE P1,904,000
2. 140
BVPS= 1,904,000/13600= 140
PROBLEM NO. 2
1. 2018: P3,729,440
2019: P4,175,200
2018: Given
2019:
Beginning balance P3,729,440
Feb. 1 66,000
May 1 76,800
May 31 -
Sept. 1 (18,000)
Oct. 1 PS 39600
OS 652,960 (692,560)
Nov. 1 22,000
Dec. 31 991,520
SHE P4,175,200
2. 2018: 8.56
2019: 5.81
2018 BEPS= [(1,345,040-32,400)/(76,680x2)]= 8.56

BEPS= [(991,520-39,600)/163,708]= 5.81
PROBLEM NO. 3
Market value of share right on minus subscription price

Number of rights to purchase one share plus 1 = Value of one right
[(282-210)/(5+1)] = P12 per right
Ordinary shares on Jan. 1 400,000

Ordinary shares issued
through exercise of rights on April 1 60,000
Total ordinary shares on April 1 460,000
Jan. 1 400,000 x 282/270 x 3/12 = 104,444

Apr. 1 480,000x 9/12= 360,000
Ave. number of shares 464,444
BEPS= 8,000,000/464,444= 17.22
PROBLEM NO. 4
Ordinary shares outstanding 110,000

Potential ordinary shares from convertible preference shares 20,000
Total ordinary shares 130,000
Diluted EPS (850,000 net income / 130,000) 6.54

Book Value Per Share and Earnings Per Share Book Value Per Share

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Book Value Per Share and Earnings Per Share Book Value Per Share

Uploaded by

Copyright:

Available Formats

BOOK VALUE PER SHARE AND EARNINGS PER SHARE

BOOK VALUE PER SHARE

The dividend right may be:

 For non-cumulative preference shares

Amount of participation for preference shares may be computed as follows:

Amount of participation of PS (balance for participation x total par value

2. Compute for the excess of par using this formula:

Excess over par xx

 For non-cumulative preference shares

Total ordinary shareholders’ equity P9,830,000

ALTERNATIVE SOLUTION (TABULAR)

Total ordinary shareholders’ equity P9,710,000

ALTERNATIVE SOLUTION (TABULAR)

*Amount of participation for PS may be computed as follows:

Par value of outstanding shares Amount of participation

Total ordinary shareholders’ equity P8,664,000

1. CUMULATIVE AND PARTICIPATING UP TO 18%

*Amount of participation for PS may be computed as follows:

Total ordinary shareholders’ equity P9,650,000

2. CUMULATIVE AND NONPARTICIPATING (THE PREFERENCE SHARE HAS

Total ordinary shareholders’ equity P9,610,000

EARNINGS PER SHARE

 Basic loss per share

Date Share Changes Shares Outstanding

Computation of weighted average number of shares outstanding:

Share bonus (share dividends) and share splits

Computation of weighted average number of shares outstanding:

ILLUSTRATION: BASIC EARNINGS OR LOSS PER SHARE

DILUTED EARNINGS PER SHARE

Dilutive Potential Ordinary Shares

ILLUSTRATION: CONVERTIBLE BONDS PAYABLE

Required: Compute for the BEPS and DEPS for 2019.

* 4,000,000 x 10% x 9/12

Determination of Diluted EPS

ILLUSTRATION: CONVERTIBLE PREFERENCE SHARES

Required: Compute for the BEPS and DEPS for 2019.

BEPS=P5,000,000 – (4,000,000 x 10%)

DEPS= 5,000,000/115,000 shares*= P43.48 per share

OPTIONS AND WARRANTS

Determination of Diluted EPS

A. OPTIONS OR WARRANTS ARE NOT EXERCISED.

3. Compute for the incremental shares using the following formula:

6. Compute for the diluted EPS using the following formula:

B. OPTIONS OR WARRANTS ARE EXERCISED

1. Computation of the assumed treasury shares

3. Computation of the total weighted averages of outstanding ordinary shares

ILLUSTRATION: OPTIONS AND WARRANTS

Employee share options outstanding during the year:

1. BEPS = P5,000,000/ 100,000 = P50 per share

Option shares 20,000

Option shares 20,000

B. DEPS = P5,000,000/ 103,000 shares* = P48.54 per share

3. BEPS = P5,000,000/ 105,000* = P47.62 per share

MULTIPLE POTENTIAL DILUTIVE SECURITIES

For convertible preference shares

For convertible bonds payable

ILLUSTRATION: MULTIPLE POTENTIAL DILUTIVE SECURITIES

Furthermore, below is the list of securities issued by Stay Safe.

Type of security Par or face value Description Conversion terms

Profit Ordinary Shares EPS

*Net income less preference dividends [(1.5M – (50,000 x 100 x 10%)]

Answer: the final diluted EPS would be 6.47 per share.

2. From discontinued operations