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Hello Mike
I am not quite understanding the thinking behind the calculations so please excuse me if my questions seem a bit ridiculous.Q3- the answer included 2,400,000 diluted @$5 which forms part of the 600,000 shares. I’m guessing that the 2,400,000 was arrived at by 3,000,000-[3,000,000/ $5] ? If this is correct then why divide by $5 and not $4 ?
Q4-the answer included 760 equity shares as opposed to 740. Was the 760 chosen because the date, 31 Dec 2013 is closer to 2009?
Without the question in front of me ……. for question 3, isn’t this a question about directors’ options when calculating diluted earnings per share? If I have remembered correctly, the thinking you need to apply is: 1) “When these options are exercised, how much money will the company receive?” 2) “If the company had wished to raise that same amount of money at any time through the year, how many shares would they have had to issue at average mid-market price (given in the question)?”.
Now, by deducting number of shares at mid-market price from the number of shares involved in the options, we arrive at the number of “free” shares involved in the option and it’s those “free” shares which are the diluters.
So, it’s got nothing to do with dividing by 5 or 4 or anything in fact
For question 4, did you actually listen to the lecture (is there a lecture or are you simply working through the course notes?)
Our Global Investor is wanting to know “What is the WORST position with reference to earnings per share if all these conversions could have taken place, and had in fact taken place, with effect from the earliest possible date in the year just passed?”
In the case of conversions, the WORST position is where the denominator is increased (in the situation of a variety of conversions) by the greater / greatest number. In the case you mention, it has nothing to do with the fact that 31 December, 2013 is the date nearest to 2009
There are no lectures for chapter 21 so I’m going through the notes. Your explanation definitely helped. Thanks Mike!
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