ACCT2542_S2_2008_Solution_PracticeQuestions

ACCT2542_S2_2008_Solution_PracticeQuestions - Solution to...

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1 Solution to Tutorial and Practice Questions (Weeks 10-12) Solution to Practice questions available on Course Web Page Week 10 - Earnings per share Practice Questions Deegan, Chapter 27, Review Questions 7, 10 and 13 ---------- 27.7 Earnings calculation Net profit after tax $1 000 000 Less: Preference share dividends (6 000) Net profit after-tax less preference dividends $ 994 000 Theoretical ex bonus price = ($3.00)(5) + 0 = 2.50 5 + 1 Adjustment factor = 2.50 ÷ 3.00 = 0.8333 Calculation of the weighted average number of ordinary shares and ordinary share equivalents Portion No. Adjustment Weighted average Period of year outstanding factor no. of shares Fully-paid ordinary shares 1/7/08–30/9/08 92/365 600 000 0.8333 181 487 1/10/08–30/4/09 212/365 750 000 0.8333 522 761 1/5/09–30/6/09 61/365 900 000 150 411 854 659 Basic earnings per share for 2009 would be: $994 000 ÷ 854 659 = $1.1630 The comparative figures for 2008 would be adjusted for the bonus issue. The adjusted figure would be: $2.30 × 0.8333 = $1.9166. Note that when determining the weighted average number of shares for the current financial year, the number of shares outstanding prior to the bonus issue is divided by the adjustment factor. Failure to adjust previous period’s earnings would provide misleading figures as it would appear that the company was not performing as well, when in fact the reduction in EPS may be due to the bonus issue.
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2 27.10 Earnings Shares Basic $ (290 000 – 20 000) $270 000 2 000 000 Conversion of preference shares 1 000 000 × ½ 500 000 Saved preference dividend 20 000 $290 000 2 500 000 Diluted earnings per share = $290 000 2 500 000 = $0.116 27.13 The profit after tax earnings for each 6-month period is calculated using the first two columns given in the question, as follows: 12 Months 6 Months 6 Months to 30/6/09 to 31/12/08 to 30/6/09 Profit 17 500 000 7 035 800 10 464 200 Income tax expense 5 500 000 1 756 000 3 744 000 Profit after tax 12 000 000 5 279 800 6 720 200 Basic EPS 365 days × 5 000 000 = 5 000 000 365 days EPS = $12 000 000/5 000 000 = $2.40 Diluted EPS Options As the options had not been on issue for the entire year, we must weight them for the time they were outstanding. The Standard requires that we consider the number of shares that would effectively be issued for no consideration if these options are exercised. To determine this we make the following calculation: Options issued on 15 September 2008 Number of shares issuable: 10 000 000 Number of shares that would be issued at market price for the actual proceeds of $25 000 000 = $25 000 000 ÷ $2.20 11 363 636 Number of shares deemed issued for no consideration (1 363 636) As the above calculation is negative, meaning no shares would be issued for no consideration given the current market price, and as the exercise of the options is not mandatory, then the above option issue is not dilutive and can be ignored for the purposes of calculating diluted EPS.
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3 Options issued on 25 March 2009
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This note was uploaded on 01/10/2012 for the course FINS 3616 taught by Professor Curry during the Three '10 term at University of New South Wales.

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ACCT2542_S2_2008_Solution_PracticeQuestions - Solution to...

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