BOOK VALUE PER SHARE

Definition of Book Value Per Share

It is the amount that would be paid on each preference share and ordinary
share assuming the entity is liquidated and the amount available to shareholders is
exactly the same amount reported as shareholders’ equity.

Where there is only one class of share, the formula for the computation of
book value per share is:
'
Total Shareholder s Equity
Book Value per share=
No . of Outstanding Shares

Where there are two or more classes of shares, the total shareholders’
equity is allocated between the different classes of shares:

'
Preference Shareholder s Equity
Book Value per share( PS)=
No . of Preference Outstanding Shares
'
Ordinary Shareholder s Equity
Book Value per share(OS)=
No . of Ordinary Outstanding Shares

Notes:
1. Subscription receivable is NOT DEDUCTED for book value per share
computation.
2. Treasury shares are considered retired for book value per share computation.

Computation for Book Value per Share

When allocating total shareholders’ equity to different classes of shares, the
residual equity theory is used. Under this theory, the ordinary shareholders’ equity
is a residual amount after deducting preference shareholders. Equity from total
shareholders equity is computed as follows:

Excess
Ordinary SHE=Ordinary Share Capital+Ordinary Subscribed ShareCapital +Share∈
par
Excess
Preference SHE=Preference Share Capital+ Preference Subscribed Share Capital+ Share∈
par

Excess over par consists of the following:

1. Share premium
2. Retained earnings
 3. Other comprehensive income and losses

The above items are to be allocated to preference SHE and ordinary SHE after
considering the following:

 Liquidation value of preference shares. Liquidation value is the amount

which the preference shareholders normally receive upon liquidation of
the entity. The liquidation value may be more than the par or stated value.
In the absence of liquidation value, the preference shareholders shall
receive an amount equal to the par or stated value.

 Types of preferred shares:

1. Non - cumulated PS – one on which the right to receive dividends is
forfeited in any one year in which dividends are not declared.
2. Cumulative PS – one on which any undeclared dividends
accumulate each year until paid.
3. Non-participating PS – one that is entitled to receive only the
dividends equal to the fixed preference rate.
4. Participating PS – one which is entitled to receive dividends in
excess of the basic or fixed dividend rate. Participating preference
share may be fully participating with ordinary share on a pro-rata
basis or participating only to a certain amount or percentage.
However, before the preference share can participate, the ordinary
share should receive first an amount equal to the basic preference
rate, meaning preference rate times the par value of the ordinary
share outstanding.
Notes:
1. What is to be deducted is dividend in arrears, if there is none, nothing is to
be deducted.
2. If there are 2 classes of preference shares, both of which are participating,
the lower rate shall be used for the basic dividend to be given to ordinary
shares before participation.
3. The balance for participation is allocated to various classes of shares
prorate based o aggregated par values.
4. If there is a deficit, the preference shareholders would share on a prorate
basis with the ordinary shareholders.

EXERCISES

1. The shareholders’ equity of Karmina Corporation in the statement of financial

position on December 31, 2023, revealed the following account balances:
Ordinary share capital (P10 par value) 600,000
 Subscribed ordinary share capital 400,000
10% Preference share capital (P50 par value) 2,000,000
Subscribed preference share capital 1,000,000
Subscription receivables – ordinary 200,000
Subscription receivables- preference 400,000
Retained earnings – unappropriated 1,000,000
Retained earnings – appropriated 600,000
Share premium 400,000
Revaluation increment 600,000
Unrealized gain on FVOCI 400,000

If the equity is to be liquidated, the preference shareholders would receive par

value plus a premium of P 1,000,000. The last dividend payment was on
December 31, 2018.

Requirement: Compute the book value per ordinary and preference share under
the following assumptions:

a. The preference shares are non-cumulative and non-participating.

b. The preference shares are cumulative but non-participating.
c. The preference shares are non-cumulative but fully participating.
d. The preference shares are cumulative and fully participating.
e. The preference shares are cumulative but participating only up to 16%.

2. Kian Inc. has an authorized share capital of 10,000, 8% cumulative preference

shares with P 100 par value and 100,000 ordinary shares with P10 par value. The
entity reported the following shareholders’ equity on December 31, 2023:
Preference share capital 500,000
Ordinary share capital 900,000
Share premium 90,000
Retained earnings 138,000
Treasury ordinary shares – 1,000 at cost (20,000)
Total SHE 1,608,000
Dividend on preference shares are in arrears for 2023.

Requirement: What is the book value per ordinary share?

3. Below is the shareholders’ equity section of Kiko Corporation on December 31,

2023:
Preference share capital, 7%, P100 par value,
60,000 shares 6,000,000
Issued, total liquidation value of P 6.4M
Ordinary share, no par, 50,000 shares, issued 3,000,000
Donated capital 1,000,000
Accumulated profits 9,000,000
 All preference dividends have been fully paid. The preference shares are
cumulative but not participating.

Requirement: How much is the book value per share of ordinary shares?

4. The stockholders’ equity of Khamar Corporation on December 31, 2023 includes

the following:
12% Preference share capital, 20,000 shares, 2,000,000
P100 par
14% Preference share capital, 10,000 shares, 3,000,000
P300 par
Ordinary share capital, 50,000 shares, P100 par 5,000,000
Retained earnings 2,240,000
Share premium 1,500,000
The 12% share is cumulative and fully participating. The 14% share is non-
cumulative and fully participating. Dividends have not yet been paid for 3 years.

Requirement: Compute for the book value per ordinary share.

 EARNING PER SHARE

Basic Concepts

Earning per share (EPS) represents the amount expected to be received by an

ordinary shareholder each year as a return on investment. Basically, EPS is a
profitability ratio computed to show the profit or loss earned or incurred by each
ordinary share.

Based on the definition, EPS applies only to ORDINARY SHARES. Normally, no

EPS is computed for preference shares since they have a fixed return.

The presentation of EPS is required for entities whose ordinary shares or

potential ordinary shares are publicly traded and by entities that are in the presence
of issuing ordinary shares or potential ordinary shares in the public securities
market. Simply stated, presentation of EPS is required for PUBLIC ENTITIES. Non-
public entities are not required but encouraged to present EPS for comparability
purposes.

Uses of EPS

1. Assessment of value of the shares

2. Promotion of comparability
3. Basis for dividend policy
Types of EPS
Both types of EPS are presented in financial statements with equal
prominence.
1. Basic Earnings Per Share (BEPS) – computed using the following formula:
Profit ( Loss )−Preferred Dividends
¿
Weighted Average Ordinary Shares Outstanding
Notes:
 Profits or loss should be after tax
  Preferred dividends are to be deducted as follows:
o If the preference shares are cumulative, one year dividend is
deducted, whether declared or not.
o If the preference shares are non-cumulative, only the dividends
declared during the period are deducted.
 Dividends in arrears are ignored for EPS computation purposes
 Outstanding shares = Issued shares + Subscribed shares –
Treasure shares
 The denominator used is the weighted average number of shares
outstanding. This means, a time-weighted factor is applied to compute
the weighted average amount. Shares are usually time-weighted from
the date the consideration is receivable (generally the date of issue)
 Treatment of the following items:
o When ordinary shares are issued without a corresponding change in
resources, the basic EPS as well as the as diluted EPS and the
weighted average number of shares outstanding during the period
and all periods presented are adjusted for retrospectively. (As if the
event had occurred at the beginning of the earliest period
reported.)
o Issuance of stock rights also creates a bonus element because
usually, when rights are issued to shareholders most often the
exercise price is less than the fair value of the shares. Thus, for
basic and diluted EPS computation, the number of shares
outstanding for all periods before the rights issue is multiplied with
the following adjustment factor:

Adjustment Factor=FV of shares ¿−on ¿

FV of shares ex−¿

o The FV of shares ex-right is computed as:

Theoretical Value of 1 ¿=FV of shares ¿−on−Subscription Price ¿ purcha

No . of rights needed ¿

Note: The adjustment factor is applied to outstanding shares

before the exercise date.

2. Diluted Earnings Per Share (DEPS) – is an EPS reflecting maximum dilutions

that would have resulted from potential ordinary shares. Simply stated,
potential ordinary shares are considered when computing for DEPS only when
they are dilutive. They are dilutive if, when exercised, they decrease Basic
EPS or increase Basic Loss per share. If potential ordinary shares are anti-
dilutive (opposite dilution), then only BEPS shall be presented. Potential
ordinary shares are financial instruments or other contracts that may entitle
its holder to ordinary shares. Examples are:
a. Convertible preference share
b. Convertible bonds
c. Options, warrants, and their equivalents

Computing DEPS uses the “as-if assumptions”; As if the convertible

preference shares or convertible bonds have been converted or as if the
options and warrants have been exercised.

The conversion or exercise is assumed to have taken place on the date

the potential ordinary shares first became outstanding, regardless of the date
of actual conversion or exercise.

Computation of DEPS:

a. Convertible Bonds

Profit ∨Loss−PS Dividends+ Interest Expense , net of tax

DEPS=
Weighted average OS plus potential OS

The convertible bonds were assumed to have been converted into

additional ordinary shares. Therefore, if that is the assumption,
interest expense after tax incurred on the bonds are added back to
profit or loss.

b. Convertible Preference Shares

Profit∨Loss
DEPS=
Weighted average OS plus potential OS

If there are convertible PS, the PS are assumed to be

converted into ordinary shares. Accordingly, the net income
is not reduced by the amount of preference dividend. The
number of ordinary shares outstanding is increased by the
number of ordinary shares that would have been issued upon
conversion of the preference shares.

Note: If the convertible preference shares were actually

converted during the year, the dividends must be declared
before conversion to be deducted for BEPS purposes.

c. Options and Warrants

Profit∨Loss
DEPS=
Weighted average OS plus potential OS
 Options and warrants are included in the computation of
DEPS only when they are dilutive. They are dilutive when the
exercise price or option price is less than the average market
price of the ordinary share.

In computing the potential ordinary shares for DEPS computation, the

treasury shares method is to be used which assumes the following:
 The options or warrants are exercised
 The proceeds received from the exercise are used to purchase treasury
shares at the average market price
 The difference between treasury shares assumed to have been
purchased and the option shares represents the incremental shares or
potential ordinary shares

Note: Potential ordinary shares from options and warrants are

averaged until the date of exercise only.

Contingently Issuable Shares

Contingently issuable shares are ordinary shares issuable for small or no cash
consideration upon satisfying specified conditions in a contingent share agreement.
These shares are averaged when the conditions have been satisfied.

Multiple Potential Ordinary Shares

When there are two or more potential ordinary shares, they need to be
ranked according to their dilutive effect on BEPS. The entity shall provide selection
or combination of securities producing the lowest EPS. The following steps shall be
followed in computing for DEPS:
1. Compute the BEPS
2. Rank securities according to which of them is most dilutive (i.e.
producing the least incremental EPS). They are included in the
computation step by step according to their ranking.

Usually, the most dilutive securities are options and warrants since they
affect only the denominator of the formula but not the numerator. The following are
the computation of the incremental EPS generated by each security, to be used for
their ranking:
1. Option and warrants – when Exercise Price < Market Price
2. Convertible bonds – After Tax Interest Expense / Potential OS

3. Convertible PS – Preferred Dividends / Potential OS

 Note: If any time the DEPS exceeds the BEPS, the entity discontinues
considering further potential ordinary shares and the lowest amount computed is
the amount presented as DEPS.

Presentation and Disclosure

An entity shall present on the face of the income statement basic and diluted
EPS for income or loss from continuing operations. An entity that reports
discontinued operations shall disclose the basic and diluted amounts per share for
the discontinued operation either on the face of the income statement or in the
notes to financial statements.

When an entity presents both consolidated financial statements, the

disclosures required need to present only on the basis of the consolidated
information.

An entity that chooses to disclose EPS on the separate financial statements

shall present such EPS information only on the face of the separate income
statement. An entity shall not present such earnings per share information on the
consolidated financial statements.

EXERCISES

1. The following information was obtained from the Statement of Financial Position
of Graceful Inc. on December 21, 2023:
6% convertible 10-year bonds at par 2,000,00
0
Ordinary shares, P20 par, 110,000 shares issued and 2,200,00
outstanding 0
Retained earnings 950,000
Each 1,000 bond can be converted into 40 shares of ordinary shares. On
September 30, 2024, the bonds were all converted into ordinary shares. Graceful
reported net income of P 600,000 in 2024.

Required: Compute the BEPS and DEPS for the year ended December 31, 2024.

2. Presented below is the shareholders’ equity section of the comparative balance

sheets of Inviting Co. on December 31, 2023, and 2022:
12/31/202 12/31/20
3 22
12% Preference shares, P 100 par 165,000 135,000
Share premium – preference 26,800 18,400
Ordinary shares, P10 par* 821,200 799,200
Share premium – ordinary 128,600 117,600
Share premium – treasury 3,600 1,600
 Retained earnings 942,400 792,920
* Par value after June 1, 2023, stock split

Inviting had 32,500 ordinary shares outstanding at December 31, 2021.

The following shareholders’ equity transactions were recorded in 2022 and 2023:
2022
May 1 Sold 4,500 ordinary shares for P 24, par value P 20.
June 30 Sold 350 preference shares for P124, par value P100
Aug. 1 Issued an 8% stock dividend on ordinary shares. The market value
of the shares was P30 per share
Sept. 1 Declared cash dividends of 12% on preference share and P3 on
ordinary shares
Dec. 31 Income from ordinary activities for the year totaled P 632,400. In
addition, Inviting had an ordinary gain of P 40,120, net of tax.
2023
Jan. 31 Sold 1,100 ordinary shares for P30
May 1 Sold 300 preference shares for P128
June 1 Issued a 2-for-1 split of ordinary shares. The par value of ordinary
share was reduced to P10 per share
Sept. 1 Purchased 500 ordinary shares for P18 to be held as treasury shares
Oct. 1 Declared cash dividends of 12% on preference shares and P4 per
share on outstanding ordinary shares
Nov. 1 Sold 500 shares of treasury shares for 22
Dec. 31 Reported net income for the year.

Required: Compute the Basic EPS for 2022 and 2023.

3. ABC Corp. had the following information for the year ended December 31, 2024:
 Net income: P 1,500,000
 Weighted average common shares outstanding: 500,000
Potential dilutive securities:
a. Options and Warrants:
o 50,000 options outstanding with an exercise price of P20.
o Average market price of the common stock during the year:
P25.
b. Convertible Bonds:
o P 1,000,000 of 6% convertible bonds were issued at par.
o Each P 1,000 bond is convertible into 40 common shares.
o Interest is tax-deductible.
o Tax rate: 30%
c. Convertible Preference Shares:
o 10,000 convertible preference shares outstanding.
o Each share pays a $5 annual dividend.
o Each preference share is convertible into 3 common shares.

Required: Compute the Basic EPS and Diluted EPS.

4. GHI Corp. had the following data for the year ended December 31, 2024:
  Net income: $900,000
 Weighted average number of common shares outstanding: 300,000
 Income tax rate: 25%
Potential Dilutive Securities:
a. Stock Options:
o 100,000 options with an exercise price of $40
o Average market price of the stock during the year: $35
b. Convertible Bonds:
o $2,000,000 of 5% bonds
o Each $1,000 bond is convertible into 10 common shares
o Interest is tax-deductible
c. Convertible Preferred Shares:
o 10,000 preference shares
o Annual dividend: $4 per share
o Each share is convertible into 2 common shares

Required: Compute the Basic EPS and Diluted EPS.