- 15 Marks
FR – L2 – Q62 – Financial Instruments
Question
Kumasi Ventures Plc has had 5 million shares in issue for many years. Earnings for the year ended 31 December Year 4 were GH₵2,579,000. Earnings for the year ended 31 December Year 3 were GH₵1,979,000. Tax is at the rate of 30%.
Outstanding share options on 500,000 shares have also existed for a number of years. These can be exercised at a future date at a price of GH₵3 per share. The average market price of shares in Year 3 was GH₵4 and in Year 4 was GH₵5.
On 1 April Year 3 Kumasi Ventures Plc issued GH₵1,000,000 convertible 7% bonds. These are convertible into ordinary shares at the following rates:
On 31 December Year 6: 30 shares for every GH₵100 of bonds
On 31 December Year 7: 25 shares for every GH₵100 of bonds
On 31 December Year 8: 20 shares for every GH₵100 of bonds
Required:
Calculate the diluted EPS for Year 4 and the comparative diluted EPS for Year 3
Answer
Adjusted total earnings
Year 4
| | GH₵ |
| Reported earnings | 2,579,000 |
| Add back interest saved (1,000,000 × 7%) | 70,000 |
| (1,000,000 × 7% × 9/12) | 52,500 |
| Minus tax at 30% | (15,750) |
| Adjusted total earnings | 2,615,750 |
Year 3
| | GH₵ |
| Reported earnings | 1,979,000 |
| Add back interest saved (1,000,000 × 7% × 9/12) | 52,500 |
| Minus tax at 30% | (15,750) |
| Adjusted total earnings | 2,015,750 |
Number of shares
Year 4
| | Number of shares |
| 1 January | 5,000,000 |
| Dilutions: | |
| Share options (W) | 200,000 |
| Convertible shares (1,000,000 ÷ 100 × 30) | 300,000 |
| 31 December | 5,500,000 |
Year 3
| Date | | Number of shares | Time factor | Weighted average number of shares |
| 1 January | Brought forward | 5,000,000 | | |
| | Share options: dilution (W) | 125,000 | | |
| | | 5,125,000 | 3/12 | 1,281,250 |
| 1 April | Convertibles: dilution | 300,000 | | |
| | | 5,425,000 | 9/12 | 4,068,750 |
| | | | | 5,350,000 |
Diluted EPS
Year 4 = 2,615,750 / 5,500,000 = GH₵0.48 or 48c
Year 3 = 2,015,750 / 5,350,000 = GH₵0.38 or 38c
Working
Cash receivable on exercise of all the options = 500,000 × GH₵3 = GH₵1,500,000
Year 4
Number of shares this would buy at full market price in Year 4 = GH₵1,500,000 / 5 = 300,000 shares
| | Shares |
| Options | 500,000 |
| Minus number of shares at fair value | (300,000) |
| Net dilution | 200,000 |
Year 3
Number of shares this would buy at full market price in Year 3 = GH₵1,500,000 / 4 = 375,000 shares
| | Shares |
| Options | 500,000 |
| Minus number of shares at fair value | (375,000) |
| Net dilution | 125,000 |
- Tags: Convertible bonds, Diluted EPS, Earnings per share, Financial instruments, Share options
- Level: Level 2
- Topic: Financial Instruments
- Uploader: Samuel Duah