Earnings per share

FR – L2 – Q62 – Financial Instruments

Calculate diluted EPS for Year 4 and comparative diluted EPS for Year 3 for a company with convertible bonds and share options.

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

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Tags: Convertible bonds, Diluted EPS, Earnings per share, Financial instruments, Share options
Level: Level 2

Topic: Financial Instruments

FR – L2 – Q61 – Financial Statement Analysis

Calculate EPS for Year 5 and adjusted EPS for Year 4 for Unity Vaccines Plc after share transactions.

Question

On 1 January Year 5, Unity Vaccines Plc had 5 million ordinary shares in issue. The following transactions in shares took place during the next year.

1 February A 1 for 5 bonus issue

1 April A 1 for 2 rights issue at GH¢1 per share. The market price of the shares prior to the rights issue was GH¢4.

1 June An issue at full market price of 800,000 shares.

In Year 5 Unity Vaccines Plc made a profit before tax of GH¢3,362,000. It paid ordinary dividends of GH¢1,200,000 and preference dividends of GH¢800,000. Tax was GH¢600,500. The reported EPS for Year 4 was GH¢0.32.

Required

Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative purposes.

Answer

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Tags: Bonus Issue, Earnings per share, Financial Statement Analysis, Rights issue, Share Transactions
Level: Level 2

Topic: Financial Statement Analysis

FM – L2 – Q36 – Sources of finance: equity

Prepare profit/loss statements, calculate EPS, and determine gearing for three financing schemes for Brighton Enterprises' expansion.

Question

Brighton Enterprises wishes to expand its production facilities to meet an increase in sales demand for its products. It will need GH₵18 million of new capital to invest in equipment. It is expected that annual profit before interest and taxation will increase by GH₵5 million.
Brighton Enterprises is considering the following three possible methods of financing the expansion programme:
(i) Issuing 9 million GH₵0.50 equity shares at a premium of GH₵1.50 per share.
(ii) Issuing 12 million 12% GH₵1 preference shares at par and GH₵6 million 10% debentures at par.
(iii) Issuing 6 million equity shares at a premium of GH₵1.50 per share and GH₵6 million 10% debentures at par.

Assume that the rate of tax on profits is 25%.

The statement of financial position of Brighton Enterprises as at 31st November Year 6 is as follows:

Statement of financial position as at 30th November Year 6

	GH₵m	GH₵m
Non-current assets		24.8
Current assets
Inventory	18.5
Trade receivables	21.4
Bank	1.9
		41.8
Total assets		66.6
Equity and liabilities
GH₵0.50 ordinary shares		10.0
Accumulated profits		22.4
Total equity		32.4
10% Debentures		15.0
Current liabilities
Trade payables
Taxation
		19.2
Total equity and liabilities		66.6

A statement of profit or loss for the year to 30th November Year 6 is as follows:

	GH₵m
Sales	115.4
Profit before interest and taxation	17.9
Interest payable	1.5
Profit before taxation	16.4
Tax (25%)	4.1
Profit after taxation	12.3

Required
(a) For each of the financing schemes under consideration:
(i) prepare a projected statement of profit or loss for the year ended 30 November Year 7.
(ii) calculate the expected earnings per share for the year ended 30th November Year 7.
(iii) calculate the expected level of financial gearing as at 30th November Year 7, assuming that dividend payments during the year are GH₵0.30 per share.

(b) Assess each of the three financing schemes under consideration from the viewpoint of an existing equity shareholder in Brighton Enterprises.

Answer

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Tags: Debt financing, Earnings per share, Equity financing, Financial gearing, Financing schemes, Shareholder perspective
Level: Level 2

Topic: Sources of finance: equity

FM – FM – L2 – Q35 – Capital structure

Analyze gearing impact on two companies' EPS and financial risk using provided financial data.

Question

The following information is available about Company A and Company B:

	Company A	Company B
Capital structure	GH¢	GH¢
Equity shares of GH¢1	10,000	10,000
Reserves	20,000	90,000
10% debt capital	30,000	—
	60,000	100,000
	100,000	100,000

| Annual profit | | | | Sales | 80,000 | 80,000 |

| Variable costs | 40,000 | 40,000 |

| Contribution | 40,000 | 40,000 |

| Fixed operating costs | 10,000 | 10,000 |

| Profit before interest and tax | 30,000 | 30,000 |

| Interest costs | 3,000 | — | | Profit | 27,000 | 30,000 |

| Tax (20%) | 5,400 | 6,000 |

| Profit after tax (= earnings after interest and tax) | 21,600 | 24,000 |

Required:

(a) Calculate the earnings per share for Company A and Company B.

(b) Calculate the level of profit before interest and tax at which the earnings per share for Company A will be equal to the earnings per share for Company B.

Answer

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Tags: Capital structure, Debt, Earnings per share, Equity, Financial Risk, Gearing, Profit after tax
Level: Level 2

Topic: Capital structure

FM – L2 – Q31 – Sources of finance: debt

Calculate the change in EPS if convertible bonds are converted into equity shares for a company with given financial data.

Question

A company has the following equity shares and bonds in issue:

2,000,000 equity shares of GH¢0.50 each.

GH¢1,000,000 of 4% convertible bonds.

The current earnings per share (EPS) is GH¢0.25.

The rate of tax is 30%.

The convertible bonds are convertible into equity shares at the rate of 40 shares for every GH¢100 of bonds.

Required

On the basis of this information, calculate the expected change in EPS if all the bonds are converted into equity shares.

Answer

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Tags: Convertible bonds, Corporate finance, Earnings per share, Equity shares, Financial instruments, Taxation
Level: Level 2

Topic: Sources of finance: debt

FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

Question

Amoah Plc and Bonsu Plc each have in issue 2,000,000 ordinary shares of GH₵1 nominal value.
Amoah Plc also has GH₵2,500,000 of 12% convertible debentures in issue. Each GH₵100 of bonds is convertible into 20 ordinary shares at any time until the date of expiry of the bonds. If the bonds have not been converted by the expiry date, they will be redeemed at 105.
Bonsu Plc has 500,000 equity warrants in issue. Each warrant gives its holder an option to subscribe for 1 ordinary share at a price of GH₵5.00 per share. The warrants can be exercised at any time until the date of their expiry.
The shares of both companies, the convertible debentures, and the warrants are all actively traded in the stock market.

Required
(a) Calculate the value of each GH₵100 unit of convertible debentures of Amoah Plc and the value of each warrant of Bonsu Plc on the day of expiry, if the share price for each company at that date is:
(i) GH₵4.40
(ii) GH₵5.20
(iii) GH₵6.00
(iv) GH₵6.80

(b) Assume that the profit before interest and tax of both companies is GH₵1,200,000 and the rate of tax is 50%.

Calculate the earnings per share for:

(i) Amoah Plc, assuming that none of the convertible debentures are converted

(ii) Amoah Plc, assuming that all of the convertible debentures are converted

(iii) Bonsu Plc, assuming that none of the warrants are exercised

(iv) Bonsu Plc, assuming that all of the warrants are exercised

Answer

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Tags: Earnings per share, Equity, Financial instruments, onvertible debentures, Profit after tax, Stock market, Warrants
Level: Level 2

Topic: Sources of finance: debt

FM – L2 – Q1 – Sources of finance: equity

Calculate and comment on ratios relevant to investors for SunnyCorp, including EPS, PE ratio, dividend yield, dividend cover, interest yield, and gearing.

Question

The following figures have been extracted from the annual accounts of SunnyCorp:

Item	Amount
Issued share capital	1,000,000 ordinary shares of ZAR 1 each, fully paid
Issued debt capital	ZAR 250,000 10% debentures
Reserves
Capital (share premium reserve)	ZAR 200,000
Accumulated profits
Profit and distributions
Profit for the year	ZAR 600,000 (before interest and tax)
Ordinary dividend payments	ZAR 0.20 per share

The current market price of SunnyCorp’s equity shares is ZAR 3.20 each. Its debentures are priced at ZAR 90 per cent. The company’s rate of corporation tax (income tax) is 30%.

Required:
Calculate the ratios that are likely to be of interest to an investor or potential investor in SunnyCorp.
Comment on each:
(8 marks for calculations, 8 marks for comments)

Answer

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Tags: Debentures, Dividend yield, Earnings per share, Equity ratios, Financial Ratios, Gearing, Investor metrics
Level: Level 2

Topic: Dividend policy

Tag (SQ): Earnings per share

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FR – L2 – Q62 – Financial Instruments

Calculate diluted EPS for Year 4 and comparative diluted EPS for Year 3 for a company with convertible bonds and share options.

FR – L2 – Q61 – Financial Statement Analysis

Calculate EPS for Year 5 and adjusted EPS for Year 4 for Unity Vaccines Plc after share transactions.

FM – L2 – Q36 – Sources of finance: equity

Prepare profit/loss statements, calculate EPS, and determine gearing for three financing schemes for Brighton Enterprises' expansion.

FM – FM – L2 – Q35 – Capital structure

Analyze gearing impact on two companies' EPS and financial risk using provided financial data.

FM – L2 – Q31 – Sources of finance: debt

Calculate the change in EPS if convertible bonds are converted into equity shares for a company with given financial data.

FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

FM – L2 – Q1 – Sources of finance: equity

Calculate and comment on ratios relevant to investors for SunnyCorp, including EPS, PE ratio, dividend yield, dividend cover, interest yield, and gearing.

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Tag (SQ): Earnings per share

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FR – L2 – Q62 – Financial Instruments

Calculate diluted EPS for Year 4 and comparative diluted EPS for Year 3 for a company with convertible bonds and share options.

You're reporting an error for "FR – L2 – Q62 – Financial Instruments"

FR – L2 – Q61 – Financial Statement Analysis

Calculate EPS for Year 5 and adjusted EPS for Year 4 for Unity Vaccines Plc after share transactions.

You're reporting an error for "FR – L2 – Q61 – Financial Statement Analysis"

FM – L2 – Q36 – Sources of finance: equity

Prepare profit/loss statements, calculate EPS, and determine gearing for three financing schemes for Brighton Enterprises' expansion.

You're reporting an error for "FM – L2 – Q36 – Sources of finance: equity"

FM – FM – L2 – Q35 – Capital structure

Analyze gearing impact on two companies' EPS and financial risk using provided financial data.

You're reporting an error for "FM – FM – L2 – Q35 – Capital structure"

FM – L2 – Q31 – Sources of finance: debt

Calculate the change in EPS if convertible bonds are converted into equity shares for a company with given financial data.

You're reporting an error for "FM – L2 – Q31 – Sources of finance: debt"

FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

You're reporting an error for "FM – L2 – Q16 – Sources of finance: debt"

FM – L2 – Q1 – Sources of finance: equity

Calculate and comment on ratios relevant to investors for SunnyCorp, including EPS, PE ratio, dividend yield, dividend cover, interest yield, and gearing.

You're reporting an error for "FM – L2 – Q1 – Sources of finance: equity"

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