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Question 6 (11 marks) On 1 January 2019, Salt Limited had 1,200,000 ordinary shares outstanding. It...

Question 6
On 1 January 2019, Salt Limited had 1,200,000 ordinary shares outstanding.
It also had 100,000 shares of 9%, $10 par, non-cumulative preference shares outstanding for the whole year of 2019. Salt Limited declared and paid preference share dividend in 2019.
During 2019, the company had the following transactions:
1. On 1 March 2019 the company issued 150,000 new shares for cash.
2. On 1 October 2019 the company purchased 600,000 of its own outstanding shares.
Net income for 2019 was $240,000.
Required:
a. Calculate the weighted-average number of ordinary shares outstanding in 2019.

b. Calculate the basic earnings per share (rounded to two decimals) for 2019.

c. As at 31 December 2019, Salt Limited has 100,000 share options outstanding. Each option can be exercised for one ordinary share at an exercise price of $5. The average market price for Salt Limited ordinary shares in 2019 is $40 per share.
Calculate the diluted earnings per share (rounded to two decimals) for 2019.

Homework Answers

Answer #1

Part A

initial shares 1200000 shares X 12 months outstanding 14400000
issued shares 150000 shares X 10 months outstanding 1500000
shares repurchased 600000 shares X 3 months outstanding -1800000
total share 14100000
average share total shares / 12 1175000

Part B

basic EPS (net income - preferred dividend)/average share
net income $240000
preferred dividend (100000 shares X $10 X 9%) $90000
average share (calculated above) 1175000
basic EPS $0.13

Part C

no.of additional shares if options are exercised 100000
cash inflow if options are exercised 100000 shares X $5 $500000
no.of shares that can be purchased using the inflow 500000 / $40 12500
net increase in common shares outstanding 87500
dilted EPS (net income - preferred dividend)/(common stock + additional shares)
diluted EPS (240000-90000)/(1200000+87500) $0.12
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