02 May 2009
In a financial organization the EPS has been caclculated as Net profit available to equity shareholders/No. of ordinary shares outstanding
An organization X ltd. is also having Debentures and Preference Shares besides ordinary equity in its Capital Structure
The organization is calculating EPS by taking into account EBIT as earnings available to equity shareholders instead of(PAT - Preference Dividend). this makes there EPS goes high as well as the market price per share and the value of the firm.
But in actual they are paying [PAT - Preference dividend(1 + CDT) - Retained Earnings] to equity holders.
is this procedure correct???
please also tell me what could be the intention of that organization in doing so???
03 May 2009
You have rightly observed that EPS = Earnings available for equity holders / number of equity shares (we assume there has been no change in number of equity shares)
X Ltd is taking EBIT/No of equity shares.
This is incorrect as equity holders are not teh only claimants on EBIT. First EBIT also has interest which belongs to debenture holders. What is left is EBT or as we call it PBT. From this we need to provide for the taxes and then we get PAT. Even this does not wholly belong to equity holders as X Ltd has outstanding preference shares. From PAT we should deduct dividend payable to preference shareholders. After deducting it we get PAT-Preference dividend. This is the earning available for equity shareholders and this should be divided with no of equity shares to get EPS.
We need not deduct retained earning from it because we are calculating EPS and not equity dividend per share.
CAclubindia
