Advanced Financial Accounting Lecturer-35

Question A company produced the following net profit of the year ending 31 December. On 1 January 2007, the number of shares outstanding was 500,000. During 2007 company announce the right issue with following details: Rights: 1 new share for each 5 outstanding (500,00/5x1 = 100,000 new shares in total) Exercise price Rs. 5.00 Last date to exercise rights: 1 March 2007 (10 months outstanding) The market (fair) value of one share of the company immediately prior to exercise on 1 march 2007 = Rs. 11.00. Required: Calculate the EPS for 2006, 2007 and 2008. Year 2006 Net-profit (Rs.) 110,000 2007 150,000 2008 180,000

Solution Theoretical ex-right price Worth in market 500,000 x Rs. 11 = 5,500,000 Right Shares 100,000 x Rs. 5 = 5,00,000 6,000,000 = 6,000,000 / 600,000 = Rs. 10 per share

Solution B. Bonus Right Against Resources (Already issued) Rs. 500,000 / 10 = 50,000 shares Bonus Element 100,000 - 50,000 = 50,000 shares 100,000

Solution C) Outstanding No. of shares 2006 2007 2008 2006 2007 2008 Opening balance outstanding 500,000 500,000 600,000 Bonus element 50,000 50,000 --- Resource Element --- 41,667 ---___ 550,000 59,1667 600,00

Solution D. EPS Earning Available to Common Stock-holders No. of weighted average shares outstanding during the year 2006 2007 2008 EPS 110,000/550,000 150,000 / 591,667 180,000/600,000 = 0.20 per share = 0.2535 per share = 0.30 per share

Diluted EPS

Question In 2007 a company had a basic EPS of Rs. 1.05 per share based on earning of Rs. 105,000 and 100,000 ordinary Rs. 1 shares. It also had in issue Rs. 40,000 15% convertible debentures which in convertible in two years time at the rate of 4 ordinary shares for every Rs. 5 of debentures. The rate of income tax is 30%. In 2007 gross profit of Rs. 200,000 and expense of Rs. 50,000 were recorded including interest on debentures of Rs. 6,000. Required: Calculate the diluted EPS.

Conversion of Debentures into Shares Rs. 40,000 x 4/5 = 32,000 Shares.

Solution (Income Statement) (Rs.) Gross profit 200,000 Less: Operating expenses 44,000 Profit from operations 156,000 Less: Financial charges 6,000 Profit before tax 150,000 Less: Income tax (150000 x 30%) 45,000 Profit after tax 105,000

Solution (Revised Income Statement) (Rs.) Gross profit 200,000 Less: Operating expenses 44,000 Profit from operations 156,000 Less: Financial charges ______0 Profit before tax 156,000 Less: Income tax (156,000 x 30%) 46,800 Profit after tax 109,200

Solution (Diluted EPS) Formula Earning in Diluted EPS / Weighted average no. of shares outstanding during the year Diluted EPS = Rs. 109,200/132,000 = Rs. 0.827 per share Dilution = Rs. 1.05 – 0.827 = Rs. 0.223 per share

Question A company has 5,000,000 ordinary shares of Rs. 0.25 each in issue, and also had in issue in 2004: Rs.1,000,000 of 14% convertible debentures, convertible in 3 years time at the rate of 2 shares per Rs.10 of Stock. Rs. 2,000,000 of 10% convertible debentures, convertible in one year time @ of 3 shares per Rs. 5 of debentures. The earning in 2004 were Rs. 1,750,000. The rate of income tax 35%. Required: Calculate the basic EPS and diluted EPS.

Working Rs. 100,000 x 2/Rs. 10 = 200,000 shares

Working Rs. 200,000 x 3/Rs. 5 = 120,000 shares

Solution (Revised Income Statement) (Rs.) Profit from operations 156,000 Less: Financial charges _ ____0 Profit before tax 156,000 Less: Income tax (156,000 x 30%) 46,800 Earnings 109,200

Solution (Income Statement) (Rs.) Profit from operations 156,000 Less: Financial charges 10,000 Profit before tax 146,000 Less: Income tax (146,000 x 30%) 43,800 Earnings 102,200

Solution Basic EPS = 102,200 / 100,000 = 1.022 per share Conversion = Rs. 40,000 x 3/Rs. 20 = 6,000 shares After conversion EPS = 109,200 / 106,000 = 1.03 per share

Solution Financial charges – 30% tax 10,000 – 3,000 = Rs. 7,000 Rs. 7,000 / 6,000 = 1.661 per share If individual EPS of potential ordinary shares is greater than the basic EPS then the potential ordinary share are anti dilutive potential ordinary share.

Dilution Dilutive potential ordinary shares Anti-dilutive potential ordinary shares

Solution Incremental EPS Rs. 1,000,000 x 14% = Rs. 140,000 Less: Tax (140,000 x 35%) = Rs. 49,000 Rs. 91,000 Incremental EPS = Rs. 91,000 / 200,000 = 0.455 per share

Solution Incremental EPS Rs. 2,000,000 x 10% = Rs. 200,000 Less: Tax (200,000 x 35%) = Rs. 70,000 Rs. 130,000 Incremental EPS = Rs. 130,000 / 1,200,000 = 0.108 per share

Solution Basic EPS = Rs. 1,750,000 / 5,000,000 = 0.35 per share Diluted EPS = Rs. 1,750,000 + 130,000 / 5,000,000 + 1,200,000 = Rs. 1,880,000 / 6,200,000 = 0.303 per share Dilution = 0.35 – 0.303 = 0.046 per share