Question

Clean Ltd. has the following shares outstanding on January 1, 2012:

a.     800,000 fully paid ordinary shares of HK$1 each; and

b.     200,000, 5% cumulative convertible preference shares of HK$20 each. Each preference share can be converted to 4 ordinary shares starting on July 1, 2018.

During the fiscal year ended December 31, 2012, the following events occurred:

1. On 1 May, 200,000 ordinary shares were issued at full market price of $20 each.

2. On 1 September, the new ordinary shares were issued to the existing ordinary shareholders by the way of rights issue in the proportion of one new share for every five shares held at HK$8 per share. The fair value of ordinary shares prior to exercise of the rights issue was HK$20.

3. On 1 October, the company announced a bonus issue to the existing shareholders. Each shareholder received one new share for every two shares that he/she held on September 30, 2012.

Required:

(a). The adjustment factor for the rights issue is______. (round to 2 decimal places such as X.XX)

(b). Compute the weighted average number of ordinary shares outstanding (WANOS) to be used for the calculation of basic earnings per share for the fiscal year 2012 in accordance with HKAS 33. Show all your workings.

Answer 1

Solution:

01.01.2012 - Shares outstanding = 8,00,000

01.05.2012 - Ordinary shares issued = 200,000

Total Shares Prior to Rights issue = 10,00,000

Rights shares issue 1:5 = (10,00,000 / 5) = 200,000 shares

Total shares outstanding as on 30.09.12 = 12,00,000 shares

01.10.12 Bonus issue (1:2) = 1200,000 / 2 = 600,000 shares

a) The theoretical ex-rights fair value per share.= The average fair value of share prior to rights issue + Proceeds from rights issue / No. of Equity shares outstanding after the rights issue

= (10,00,000 * 20) + (200,000* 8) / 12,00,000

= 216,00,000 / 1200,000

=HK $ 18 per share

The adjustment factor for rights issue = Fair value per share immediately prior to the exercise of rights / Theoretical ex-rights fair value per share.

= 20 / 18

= 1.11

b) Weighted average number of shares outstanding for basic EPS

800,000 * 1.11 * (8/12) = 592,000

200,000 * 1.11 * (4/12) = 74,000

1200,000 * (1/12) = 100,000

18,00,00 * (3/12) = 450,000

Total Weighted average shares outstanding = 12,16,000 shares