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Example 1

A Ltd is a private trading company with an issued capital of 100,000 £1 ordinary shares.

1. Ìý

   ÌýÌýÌýÌý Mr D owns 20,000 shares (20%)

1. Ìý

   ÌýÌýÌýÌý Mr E owns 20,000 shares (20%)

1. Ìý

   ÌýÌýÌýÌý Mr F owns 20,000 shares (20%)

1. Ìý

   ÌýÌýÌýÌý Mr G owns 20,000 shares (20%)

1. Ìý

   ÌýÌýÌýÌý Mr H owns 20,000 shares (20%)

Shareholders' funds £100,000 (£1 per share).

Earnings £20,000 (PER 5 = £100,000) = £1 per share (see I8.313 for an explanation of price earnings ratio (PER)).

A Ltd buys the shares of D for £20,000 (a very high price for a minority holding) = £1 per share.

The shares in issue are reduced to 80,000.

The shareholders' funds are reduced to £80,000 (£1 per share).

The earnings from the reduced assets are expected to be £16,000 (PER 5 = £80,000) = £1 per share.

Example 2

The facts are as in Example 1 except that the price paid for the shares of D is £8,000 (a