Calculate the earnings per share, Financial Accounting

Assignment Help:

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.


Related Discussions:- Calculate the earnings per share

Activity-based costing (abc), Activity-Based Costing (ABC) An accounti...

Activity-Based Costing (ABC) An accounting method that assigns identifiable costs and allocates common costs to definite product lines or business fragments Also known as pro

Related party transaction, Related Party Transaction - Business or other tr...

Related Party Transaction - Business or other transaction between persons who don't have an arm's-length relationship (for example a relationship with independent, competing intere

Business risk in company, Q. Business risk in company? Business risk is...

Q. Business risk in company? Business risk is the likelihood of a company experiencing changes in the level of its profit before interest as a result of changes in turnover or

Illustration of accounting treatment of deferred tax, Illustration of Accou...

Illustration of Accounting treatment of deferred tax A Ltd., bought an item of plant at a cost of £100,000 in year 2000. The estimated useful life of the plant was 5 years and

What is inheritance in gross income, Q. What is Inheritance in Gross income...

Q. What is Inheritance in Gross income? Inheritance - As distinguished from a BEQUEST or devise, an inheritance is property attained through laws of descent and distribution fr

Advise the directors of the entity, An entity had the following transaction...

An entity had the following transactions during the year ended 31 December 2010: The entity invested in a convertible bond on its issue date. The bond matures four years aft

Create multiple portfolios standard and poor mid cap, In this project you w...

In this project you will use your many skills to create multiple portfolios, using the Standard and Poor's Mid Cap 400 as your dataset. First, construct an index fund using a st

Balance sheet, how to solve balance sheet in five million capital

how to solve balance sheet in five million capital

Accounting for lease, what are the concept of economic substance over legal...

what are the concept of economic substance over legal form under accounting for lease?

What amount should emig report in its 2011 income statement, On its Decembe...

On its December 31, 2010 balance sheet, Emig Corp. reported bonds payable of $6,000,000 and related unamortized bond issue costs of $320,000. The bonds had been issued at par. On J

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd