ACCTBA2 LECTURE

Book Value and Earnings Per Share

Book Value per Share (BVPS)
The book value per share is of great interest and importance not only to the management of a corporation
but also to the present and prospective shareholders. The shareholders from time to time (usually every
balance sheet date) would like to find out how much is the value of each share of Share they own
(status of their investment) as a basis for determining the market price.
Book value per share is the peso equivalent of the net assets (assets less liabilities) or
shareholders' equity expressed on a per share basis.
In the computation of book value per share, it is assumed that the corporation will be liquidated and that
the assets will be sold at their book values (no gain or loss on realization).
The book value per share becomes more meaningful if it is compared with the par or stated value per
share. A very high book value per share in relation to the par or stated value per share is a good
indicator of the corporate's stability and/or profitability.
If there is only one class of Share(ordinary shares), the book value per share is computed as follows:
Total shareholders' Equity
BVPS =
Outstanding Shares
Illustration 1
Assume the following shareholders' equity accounts:
Ordinary shares, P100 par value
Share Premium - Ordinary
Accumulated Profits
Total shareholders' Equity

P 4,000,000
400,000
600,000
P 5,000,000

The book value per share is computed as follows:

P 5,000,000
BVPS =
40,000 shares
= P 125/share

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When there are two classes of Share issued (preference and ordinary shares), the computation must give
recognition to the special rights or preferences of the preference shares similar to the computation of the
dividends per share.
The computation of the book value per share for each class of Share is shown below:
Preference shareholders' Equity
BVPS of preference shares =
Outstanding Preference shares

BVPS of ordinary shares

Ordinary shareholders' Equity

Outstanding Ordinary shares

Note: The Ordinary shareholders' equity is the difference between the total shareholders'
equity and the Preference shareholders' equity.

Earnings per Share (EPS)

Earnings per share are the net earnings of a corporation for a given period of time (usually one year)
translated into a per share basis of the ordinary shares.
Example - Assume that the net income of a corporation for the year is P500,000 and there are 40,000
shares of ordinary shares outstanding.
P 500,000
EPS =
40,000
= P 12.50 share
It should be noted that EPS is applicable only to a corporation because a sole proprietorship or a
partnership does not have shares of Share. Also, EPS is computed only for ordinary shares because its
dividends vary from year to year depending on the amount of net earnings unlike in the case of
preference shares which has a fixed dividend per share regardless of the net income.
The EPS should be disclosed in the Income Statement just below the final net income.

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EPS is useful to management and other interested parties for the following reasons:
1. It can be used to evaluate the earning potential of the corporation.
2. It can be used to determine the market price of the ordinary shares.
3. It can be used for formulating dividend policies.
The computation of earning per share will depend on whether the capital structure of the corporation is
simple or complex. Capital structure refers to the long-term liabilities plus shareholders' equity.
A simple capital structure is one where the total equity of the corporation consists of ordinary shares
only. Or, if there are preference sharess or bonds payable, they are not convertible into ordinary shares
A complex capital structure is one where in addition to the ordinary shares, there are other potentially
dilutive securities ( securities which will increase the EPS) such as convertible preference shares or
bonds.
There are two types of earnings per share which can be computed according to the pronouncement
of the International Accounting Standards Committee. They are the following:
Basic Earnings per Share (BEPS) - This is applicable if the capital structure is simple.
Diluted Earnings per Share (DEPS) - This is applicable if the capital structure is complex.
Basic Earnings per Share
If there is only one class of Share (ordinary shares), the formula is:
Net Income
Basic EPS =
Weighted average outstanding shares

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If there are two classes of Share (Preference and ordinary shares), the formula is:

Basic EPS =

Net Income less Preference dividend

Weighted average outstanding shares

Note: Preference dividend is subtracted from the net income only if it is declared or if not declared, only
when the preference shares is cumulative.
Illustration 1 Only one class of Share and no changes in the outstanding shares.
Peridot Corporation has 5,000 shares of ordinary shares outstanding with a par value of P100 per share
on December 31, 2012, the net income is P1,000,000.
P1,000,000
Basic EPS =
5,000 shares
= P200/share

Illustration 2 Only one class of Share with changes in outstanding shares.

At the beginning of 2015, Topaz Corporation had 2,000 Ordinary shares outstanding. 400 shares were
issued on April 1 and another 600 shares on August 1. Net income for the year was 306,000.

Basic EPS =

P 306,000
2,550 shares

= P120/share

Because there were changes in the outstanding shares during the period, the denominator should be
the weighted average outstanding shares computed as follows:
Date
Jan1
Apr 1
Aug 1

Outstanding shares
2,000
x
2,400
x
3,000
x

Months Unchanged
3
=
4
=
5
=
12

Total
6,000
9,600
15,000
30,600