A plc is a company which is listed on the UK Stock Exchange. Your client, Mr B, currently owns 300 shares in A plc. Mr B has recently received the published financial statements of A plc for the year ended 30 September 1998. Extracts from these published financial statements, and other relevant information, are given below. Mr B is confused by the statements. He is unsure how the performance of the company during the year will affect the market value of his shares, but is aware that the published earnings per share (EPS) is a statistic which is often used by analysts in assessing the performance of listed companies.
Profit and loss accounts – year ended 30 September
|
1998 |
1997 |
|
|
£ million |
£ million |
|
|
Turnover |
10000 |
8500 |
|
Cost of sales |
(6300) |
(5100) |
|
Gross profit |
3700 |
3400 |
|
Other operating expenses |
(1900) |
(1800) |
|
Operating profit |
1800 |
1600 |
|
Interest payable |
(300) |
(320) |
|
Profit before taxation |
1500 |
1280 |
|
Taxation |
(470) |
(400) |
|
Profit after taxation |
1030 |
880 |
|
Equity dividend |
(800) |
(500) |
|
Retained profit |
230 |
380 |
Balance sheets at 30 September
|
1998 |
1997 |
|||
|
£ million |
£ million |
£ million |
£ million |
|
|
Fixed assets |
||||
|
Intangible assets |
3000 |
|||
|
Tangible assets |
4000 |
3700 |
||
|
7000 |
3700 |
|||
|
Current assets |
||||
|
Stocks |
1300 |
1000 |
||
|
Debtors |
1500 |
1200 |
||
|
Cash in hand and at bank |
100 |
90 |
||
|
2900 |
2290 |
|||
|
Current liabilities |
||||
|
Trade creditors |
900 |
700 |
||
|
Taxation |
500 |
420 |
||
|
Proposed dividend |
800 |
500 |
||
|
Bank overdraft |
600 |
700 |
||
|
2800 |
2320 |
|||
|
Net current assets |
100 |
(30) |
||
|
Total assets less current liabilities |
7100 |
3670 |
||
|
Creditors: amounts falling due |
||||
|
after more than one year: |
||||
|
Loan stock |
2000) |
(2000) |
||
|
5100 |
1670 |
|||
|
Capital and reserves |
||||
|
Called up share capital |
1500 |
500 |
||
|
Share premium account |
2700 |
500 |
||
|
Profit and loss account |
900 |
670 |
||
|
5100 |
1670 |
|||
Information regarding share capital
The called up share capital of the company comprises £1 equity shares only. On 1 April 1998, the company made a rights issue to existing shareholders of two new shares for every one share held, at a price of £3.30 per share, paying issue costs of £100 000. The market price of the shares immediately before the rights issue was £3.50 per share. No changes took place in the equity capital of A plc in the year ended 30 September 1997.
Requirements
(a) Compute the EPS figures (current year plus comparative) that will be included in the published financial statements of A plc for the year ended 30 September 1998.
(b) Using the extracts with which you have been provided, write a short report to Mr B which identifies the key factors which have led to the change in the EPS of A plc since the year ended 30 September 1997.
(c) Comment on the relevance of the EPS statistic to a shareholder like Mr B who is concerned about the market value of his shares.