## Basic EPS – Formula and EAFESH

### Formula

$$\text{Basic EPS} = \frac{\text{Earnings Available for Equity Shareholders (EAFESH)}}{\text{Weighted Average No. of Equity Shares (WANES)}}$$

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### Step 1 – Computing EAFESH

Line Item	Treatment
Total Revenue / Income	Add
Less: Total Expenses	Deduct
= Profit Before Tax (PBT)
Less: Tax	Deduct
= Profit After Tax (PAT)
Less: Preference Dividend	Deduct (rules below)
= EAFESH

> Equity dividend is never deducted — EPS is computed before distributing to equity holders.

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### Rules for Preference Dividend Deduction

Type of Preference Share	Deduct from EAFESH?
Cumulative	Always — deduct whether declared or not (obligation exists regardless)
Non-Cumulative	Only if declared — no declaration = no obligation

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### Tax Treatment: Debenture Interest vs. Preference Dividend

Item	Tax Deductible?	Net Cost to Company
Interest on Debentures	Yes	Interest × (1 − Tax Rate)
Preference Dividend	No	Full declared amount

Why it matters for EPS: When computing diluted EPS, adding back debenture interest saved must be on an after-tax basis. Preference dividend has no tax shield — add back the full amount.

Worked example

### Example 1

Cumulative vs. Non-Cumulative Preference Dividend

A company reports PAT = ₹18,00,000 and has:

10% Cumulative Preference Shares: 10,000 shares × ₹100 face value (dividend not declared this year)
10% Non-Cumulative Preference Shares: 5,000 shares × ₹100 face value (dividend not declared this year)

Item	Amount
PAT	18,00,000
Less: Cumulative Pref Div (10% × 10,000 × ₹100)	(1,00,000)
Less: Non-Cumulative Pref Div (not declared → skip)	—
EAFESH	17,00,000

Key insight: The cumulative preference dividend is deducted even though not declared, because the obligation accumulates and must eventually be paid. The non-cumulative dividend is skipped entirely.

### Example 2

Tax Shield on Debenture Interest

Company has 12% Debentures of ₹10,00,000 face value. Tax rate = 30%.

Gross interest = 12% × ₹10,00,000 = ₹1,20,000

Tax saved = ₹1,20,000 × 30% = ₹36,000

Net cost = ₹1,20,000 − ₹36,000 = ₹84,000

Contrast: ₹1,20,000 preference dividend costs the company the full ₹1,20,000 — no tax saving.

This distinction is critical when computing Diluted EPS: add back only the after-tax interest (₹84,000), not the gross amount.

⚠️ Common exam mistakes

Deducting equity dividend from EAFESH — equity dividend is never deducted in the EPS calculation.
Deducting non-cumulative preference dividend even when it has not been declared in the current year.
Forgetting that debenture interest enjoys a tax shield whereas preference dividend does not — mixing up the two overstates or understates EAFESH.
Confusing PAT with EAFESH — preference dividend must still be subtracted from PAT to arrive at EAFESH.

Reference: Para 10–12 (Basic EPS) and Para 13–20 (EAFESH computation) — AS 20 – Earnings Per Share (ICAI)

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Basic EPS – Formula and Earnings Available for Equity Shareholders (EAFESH)

Worked example

⚠️ Common exam mistakes