1. Advanced Financial Accounting
Lecturer-35

2. 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
Required: Calculate the EPS for 2006, 2007 and 2008.
Year
2006
Net-profit (Rs.)
110,000
2007
150,000
2008
180,000

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

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

5. Solution C) Outstanding No. of shares 2006 2007 2008
Opening balance outstanding 500, , ,000
Bonus element , ,
Resource Element , ___
550, , ,00

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

7. Diluted EPS

8. Question
In 2007 a company had a basic EPS of Rs 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.

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

10. Solution (Income Statement)
(Rs.)
Gross profit ,000
Less: Operating expenses ,000
Profit from operations ,000
Less: Financial charges ,000
Profit before tax ,000
Less: Income tax ( x 30%) 45,000
Profit after tax ,000

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

12. 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 per share
Dilution = Rs – = Rs per share

13. Question
A company has 5,000,000 ordinary shares of Rs 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 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.

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

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

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

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

18. 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

19. Solution Financial charges – 30% tax 10,000 – 3,000 = Rs. 7,000
Rs. 7,000 / 6,000 = 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.

20. Dilution Dilutive potential ordinary shares
Anti-dilutive potential ordinary shares

21. 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 = per share

22. 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 = per share

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