Calculate the earnings per share, Financial Accounting

Q. Calculate the earnings per share?

Dividend cover is a measure of the relationship among dividends and earnings and may be calculated for the whole company or on a per share basis but both methods will yield the same results. In order to compute the dividend cover from the information given it is first necessary to calculate the earnings per share.

A value for earnings per share is able to be obtained from the P/E ratio and current share price since the share price is the EPS multiplied by the P/E ratio. Applying a few simple algebra P/E = Share price/EPS

And therefore EPS = Share price/P/E ratio

For Spin this means EPS = 187/21·1= 8·86 cents.

For Axis this means EPS = 291/13 = 22·38 cents

The EPS figure provides us a measure of total profit per share (after tax and preference share dividends) prior to it has been divided into dividends and retained earnings. Companies are open to choose the proportion of earnings which are paid out in dividends and this is clearly indicated by the dividend cover which is measured as

Dividend per share

Earnings per share

The table demonstrates dividend yield but not the dividend value required to compute the cover. The value is able to be calculated by multiplying the share price by the percentage dividend yield.

That is Dividend value = Dividend yield (%) × Share price

For Spin this provides a dividend per share of (0·023) × (187) = 4·3 cents. For Axis the dividend per share is (0·021) × (291) = 6·11 cents.

This signifies that combining the information on EPS and dividend per share the dividend cover for Spin and Axis can be calculated as

Spin = 8·86/4·3

= 2·06

Axis = 22·38/6·11

= 3·66

An substitute method of calculation is:

Dividend cover = (100/P/E ratio)/ dividend yield

For Spin = (100/21·1)/2·3 = 2·06

For Axis = (100/13·0)/2·1 = 3·66

The lower cover for Spin point to that they have chosen to pay out more of their earnings in dividends. The figure of close to 2 for cover denotes that almost half of earnings have been paid out in dividends. For Axis the figure of over 3 for cover denotes that less than one third of their earnings have gone in dividend payments.

The degree to which a company retains profit is indicative of its desire to re-invest to maintain or increase future profits. This signifies that as a general rule, the higher the dividend covers for a business the greater the potential for future capital growth. The level of dividend cover differs widely between industries because the scales of investment required maintain/improve production varies across industries. As a result investors should take care to make sure that they only compare the dividend cover of companies that are in the same sector.

Posted Date: 7/11/2013 8:09:42 AM | Location : United States







Related Discussions:- Calculate the earnings per share, Assignment Help, Ask Question on Calculate the earnings per share, Get Answer, Expert's Help, Calculate the earnings per share Discussions

Write discussion on Calculate the earnings per share
Your posts are moderated
Related Questions

This subject has really beeen difficult for me. This is, by far, the most challenging assignment I have had to deal with. Please help! If someone can do it for me, that would be ev

1) The detailed information is on the second tab marked "Financials". Enter summarized Balance Sheet and Income Statement information for Cummins into the template on the "Summary

I need help with a mini accounting project. Here is a link to the questions I need to be answered. Read the questions and instructions and if you think you can complete the case wi

Q. Stock dividends and stock splits have the following effects on retained earnings: Stock Splits Stock Dividends a. Increase No change b. No change Decrease c. Decrease Decrease d

Assume your grandparents have just given you $20,000 on the condition that you invest the money in the stock market. As you contemplate making your investment choices, what account

CONVERSION INTO A COMPANY The partners may convert their business and trade in form of a company. This may be due to some of the advantages a company has over a partnership. E.g.

Vantage Company issued bonds with a $500,000 face value and a 6% stated rate of interest on January 1, 2013. The bonds carried a 5-year term and sold for 95. Vantage uses the strai

The demand curve for a product is given by Qxd = 2,000 - 5Px + 0.2Pz, Where, Pz = $500. a. What is the own price elasticity of demand when Px = $120? Is demand elastic or inelasti

Exceptions to the rule of lapse There is no lapse in either of the following cases: 1. Where the gift or disposition is made in discharge of a moral obligation recognised by t