BOOK VALUE & EARNINGS PER SHARE

BOOK VALUE PER SHARE refers to the amount that would be due to each share with
the assumption that the company would be liquidated. The amount due to shareholders is
the same amount reflected as shareholders’ equity.

PROFORMA ENTRY:

FOR One Class of Stock

Book Value per share = Total Shareholders’ Equity

Number of shares Outstanding

***For purposes of book value computation, treasury shares shall be treated retired.

Example:

The shareholders’ equity section of the balance sheet on December 31, 2006 showed the
following:

Capital stock, P100 par P2,000,000

Subscribed capital stock 500,000
Additional Paid in Capital 600,000
Retained Earnings 800,000
Treasury stock 2,000 shares at cost (100,000)

Solution:

Amount Shares
Issued P2,000,000 20,000
Subscribed 500,000 5,000
Total P2,500,000 25,000
Treasury shares at par (200,000) 2,000
Outstanding amt/shares P2,300,000 23,000
======== ======

Outstanding amount P2,300,000

Additional Paid In Capital 600,000
Retained Earnings 800,000
Total Shareholders’ Equity P 3,700,000
=========
Book Value per share = Total Shareholders’ Equity
Number of shares Outstanding

= P3,700,000
23,000 shares

= P 160.87
======

BASIC EARNINGS PER SHARE

Earnings per share(EPS) is the amount attributable to every common share outstanding
during the period.
• EPS is not necessary for preferred stock because it has definite rate of return.
• EPS is required for firms whose common shares are publicly traded.
• Non-public enterprises are not required to present EPS.

USES of EPS
• Determinant of the market value of common stock.
• Measures the performance of management in conducting it affairs.
• Basis of dividend policies of the company.

Basic computation:

Basic EPS = Net Income

Common Stock Outstanding

Note:
• Net income is equal to the amount after deducting preferred dividends.
• If preferred stock is cumulative, the dividend for the current year only is deducted
from the net income, whether such dividend is declared or not.
• If preferred stock is non-cumulative, the current dividend is deducted from net
income if there is declaration.
• If significant change in common stock arises, the weighted average number of
common stock outstanding during the year should be used as denominator.
Example 1:

5% Preferred stock, P100 par, cumulative P2,000,000

Common stock, P50 par 500,000
Net Income for the year 750,000

Solution:

Net Income for the year P 750,000

Less: Preferred Dividends for the current yr.
(2,000,000 x 5%) 100,000
Net Income to common stock P 650,000
========
• If preferred stock is cumulative, the dividend for the current year only is
deducted from the net income, whether such dividend is declared or not.

Basic EPS = P650,000

10,000

= P 65.00
======

Example 2:

5% Preferred stock, P100 par, non-cumulative P2,000,000

Common stock, P50 par 500,000
Net Income for the year 750,000
No dividend declaration for the year

Solution:

Basic EPS = P750,000

10,000

= P 75.00
======

Note: If there is dividend declaration during the year in Example 2, the answer would be
the same as Example 1.