Question

Question 3 - Week 9 Compaq Ltd has a net income after tax of $2 000 000 for the year ended 30 June 2018. At the beginning of the period Compaq Ltd has 900 000 fully paid-up ordinary shares on issue. On 1 January 2018 Compaq Ltd had issued a further 300 000 fully paid-up ordinary shares at an issue price of $2.00. On 1 March 2018 Compaq Ltd made a one-for-five bonus issue of ordinary shares out of retained earnings. The last sale price of an ordinary share before the bonus issue was $2.50. At the beginning of the current period Compaq Ltd also had 500 000, $1.00, 5% cumulative preference shares on issue. The dividends on the preference shares are not treated as expenses in the statement of comprehensive income. The basic earnings per share for the period ended 30 June 2017 was $1.50 per share. Required: a) Calculate the basic EPS amount for 2018. b) Explain what is diluted EPS. Give one example of a security that can dilute the basic EPS.

Answer 1

Answer :

(a). Calculation of basic EPS amount for 2018

Basic EPS = Earnings for equity shares / Weighted arg no. of equity shares ---------- (1)

Where,

Earnings per equity shares

= Net income - dividend on preferrence shares

= $2,000,000 - (500,000*1*5%)

= $2,000,000 - 25,000

= $1,975,000

Weighted avg no of equity shares

= 900,000*(12/12) + 300,000*(12/12) + 240,000* (10/12)

= 900,000 + 300,000 + 200,000

= 1,400,000

Substitute values in equation (1)

Basic EPS = $1,975,000 / 1,400,00 = $1.41

(b).

• Diluted EPS is used to know the quality of the companies EPS of all the convertible securities were exercised and convertable into equity shares
• Security that can dilute the basic EPS is convertable preference shares.