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ACCA Applied Skills · Financial Management · Stakeholders and impact on corporate objectives

Karlow Co's shares were priced at $4.00 at the start of the year and $4.30 at the end. A dividend of $0.20 per share was paid at the year end. Karlow's board argues that wealth was maximised because EPS rose 15%. What is the total shareholder return for the year, and does the EPS rise alone prove wealth was maximised?

Total shareholder return is (0.30 gain + 0.20 dividend) divided by 4.00, which is 12.5%. EPS growth alone does not prove wealth maximisation, because it can come from accounting changes, higher risk or gearing, and ignores share price, dividends and timing.

  1. A12.5%; no, EPS can rise without share price or dividends risingCorrect
  2. B12.5%; yes, because EPS is the main driver of wealth
  3. C7.5%; no, EPS can rise without share price or dividends rising
  4. D15.0%; yes, because EPS and return are the same measure

Explanation

TSR = (4.30 - 4.00 + 0.20) / 4.00 = 0.50/4.00 = 12.5%. EPS growth can arise from cost cutting, accounting policy changes or higher gearing and ignores risk and timing, so it does not prove wealth was maximised. 7.5% results from omitting the dividend.

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