The average share price over the year was 300 Required a Compute the basic EPS

The average share price over the year was 300

  • University of Texas
  • ACCT 3302
  • Notes
  • rhuynh80
  • 9
  • 100% (30) 30 out of 30 people found this document helpful

This preview shows page 6 - 9 out of 9 pages.

The average share price over the year was $3.00. Required : (a) Compute the basic EPS amount for X2. (b) Compute the diluted EPS amount for X2. Calculating earnings for basic EPS : Reported after tax net income $800,000 less : Pref share divs (400,000 x $1 x 10%) 40,000 Op profit after tax less pref divs $760,000
Image of page 6
7 of 9 Calculating weighted average number of ordinary shares and ordinary share equivalents: Weighted Total Conversion Weighted Av Dates Av # Days # Shares Factor No. Shares Fully paid ordinary shares 1/7/X1-31/10/X1 123/365 400,000 134,794 1/11/X1-30/6/X2 242/365 500,000 331,507 Partly-paid ordinary shares 1/7/X1-30/6/X2 365/365 100,000 0.60/1.50 40,000 Total wtd av number of ord shares 506,301 Basic EPS for X2 = $760,000 = $1.50 506,301 Test the potential ordinary shares to see if they are dilutive: Convertible preference shares - If the preference shares were converted, then no preference share dividend would be paid. Therefore, the preference share dividend is not subtracted in determining diluted EPS. - Therefore, the notional after tax earnings adjustment is $40,000. - The number of ordinary shares outstanding would be increased by the number of ordinary shares that the preference shares can be converted into. - Therefore, the adjustment for potential ordinary shares is 100,000. - EPS effect = $40,000 = $0.40 100,000 - As EPS Effect < Basic EPS the convertible cumulative preference shares are dilutive. Convertible debentures - If the debentures were converted the interest expense (after tax) would not have been subtracted from earnings. Therefore, the interest expense (after tax) is added back. - Therefore, the notional after tax adjustment is: $1,000,000 x 8% x (273/365) x (1 - 0.40) = $35,901 - The debentures were issued during the year, so the potential ordinary shares will be weighted for the period outstanding if they are dilutive. The number of ordinary shares
Image of page 7
8 of 9 outstanding would be increased by the number of ordinary shares that the debentures can be converted into, weighted by the number of days outstanding. - Therefore, the potential ordinary shares are: 200,000 x (273/365) = 149,589 - EPS effect = $35,901 = $0.24 149,589 - As EPS Effect < Basic EPS, the convertible debentures are dilutive. Partly-paid shares - As the directors believe that a call on the partly-paid shares would be successful, they are considered to be dilutive potential ordinary shares even if they cause EPS to increase. - Funds received from call: = 100,000 x (1.50 - 0.60) = $90,000 - These funds could have purchased 30,000 shares at the average market price (90,000/3) - However, the potential ordinary shares that would result from the conversion is 60,000 (100,000 - 40,000) - Therefore, in effect, 30,000 shares are deemed to be issued for no consideration (60,000 – 30,000) - Partly paid shares are considered dilutive and must be included in the calculation of diluted EPS Calculate diluted EPS including potential shares from partly paid shares : Diluted EPS = $760,000 + 0 = $1.42 506,301 + 30,000 THIS IS OUR STARTING POINT! Calculate diluted EPS including potential shares from partly paid shares & debentures : Diluted EPS = $760,000 + 0 + 35,901 = $1.16 506,301 + 30,000 + 149,589 As this EPS is less than Basic EPS of $1.42, potential shares from the conversion of debentures are considered dilutive.
Image of page 8
Image of page 9

You've reached the end of your free preview.

Want to read all 9 pages?

  • Summer '19
  • Corporate Finance, Dividend, Merck, ordinary shares, Basic EPS, random walk model

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture