Answer to Question #291269 in Accounting for Jaganis

Question

The profit after tax for Barstead for the year ended 30 September 2009 was $15 million. At 1 October 2008 the company had in issue 36 million equity shares and a $10 million 8% convertible loan note. The loan note will mature in 2010 and will be redeemed at par or converted to equity shares on the basis of 25 shares for each $100 of loan note at the loan-note holders’ option. On 1 January 2009 Barstead made a fully subscribed rights issue of one new share for every four shares held at a price of $2·80 each. The market price of the equity shares of Barstead immediately before the issue was $3·80. The earnings per share (EPS) reported for the year ended 30 September 2008 was 35 cents. Barstead’s income tax rate is 25%. Required: Calculate the (basic) EPS figure for Barstead (including comparatives) and the diluted EPS (comparatives not required) that would be disclosed for the year ended 30 September 2009

Answer 1

1) $(basic) EPS=\frac{The earnings per share (EPS)}{Bonus weight (Bonus gross up factor)}$

 The earnings per share (EPS)=35

$Bonus weight (Bonus gross up factor=\frac{Market price before issue}{ TERP}$

$TERP=\frac{(No of old shares\times Market price before rights issue) \times (No of new shares \times Price issue)}{ Total no of shares}=\frac{(4\times3.8 + 1\times2.8)}{(4+1)}=\frac{18}{5}= 3.6$

$Bonus weight (Bonus gross up factor=\frac{Market price before issue}{ TERP}=\frac{3.8}{3.6}$

$(basic) EPS=\frac{The earnings per share (EPS)}{Bonus weight (Bonus gross up factor)}=\frac{35}{\frac{3.8}{3.6}}=33.15$

2)$diluted EPS=\frac{15 000 000}{36 000 000+25\times\frac{10 000 000}{100}+\frac{36 000 000}{4}}=\frac{15 000 000}{47 500 000}=0.3158$

Diluted EPS is calculated as the ratio of net profit after payment of dividends to the weighted average number of securities in circulation, taking into account the influence of dilutive shares in the denominator: