Effect on EPS of Changes

in Capital Structure
Introduction
• The corresponding figures for EPS for the previous
year will be comparable with the current year
because, as the weighted average number of shares
has arisen, there has been a corresponding
increase in resources. Money has been received
when shares were issued. It is assumed that shares
are issued at full market price.
•
Four such events are considered
by IAS 33:

• A. Capitalization or bonus issue (sometimes called a

stock dividend)
• B. Bonus element in any other issue, (e.g. a rights
issue to existing shareholders)
• C. Share split
• D. Reverse share split (consolidation of shares)
Capitalization/Bonus Issue and Share
Split/Reverse Share Split

• These two types of event can be

considered together as they have a
similar effect. In both cases, ordinary
shares are issued to existing
shareholders for no additional
consideration. The number of ordinary
shares has increased without an increase
in resources.
•
Right Issue

• A right issue of shares is an issue of

new shares to existing shareholders
at a price below the current market
value.
•
Procedures

• A. The EPS for the corresponding previous period

should be multiplied by the following fraction.

Theoretical ex - rights fair value per share

Fair value per share immediately before the exercise
of rights (cum rights price)
• B. To obtain the EPS for the current year you
should:

i. 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