COnversion in Eps

Hi My dear Tutor, I have a question the above subject.It is very important

The question has been taken from Bpp test bank page number 71

Barwell had 10 million ordinary shares in issue throughout the year ended 30 June 20×3.On 1 July 20×2 it had issued $2 million of 6% convertible loan stock, each $ 5 of loan stock convertible into 4 ordinary shares on 1 July 20×6 at the option of the holder.

Barwell had profit after tax for the year 30 june 20×3 $1850 it pays tax on profit at 30%

Solution

Shares on dilution
Existing-10000
Conversion(2000*4/5)-1600

Earning on Dilution

BAsic -1850

Add interest back(2000*6%*70%)-84

Diluted EPS=1934/11600=0.167

The question has been taken from 6 september 2016 past paper

Trial balance at 31 March 20×6
Equity shares of 1$-50000
6%convertible loan note-40000

The following notes are relevant:
(i) Triage Co issued 400,000 $100 6% convertible loan notes on 1 April 20X5. Interest is payable annually in arrears on 31 March each year. The loans can be converted to equity shares on the basis of 20 shares for each $100 loan note on 31 March 20X8 or redeemed at par for cash on the same date. An equivalent loan without the conversion rights would have required an interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 6% and 8%, are:

End of year
6% ————-8%
1)0·94——-0·93
2)0·89——0·86
3)0·84——0·79

Pv principal(400*100$*0.79)=31600

Pv of interest flows

20×6 (40000*6%)*0.93=2232

20×7 (40000*6%)*0.86=2064

20×8 (40000*6%)*=1896

Debt component-31600+2232+2064+1896=37792
Equity component(40000-37792)-2208
Cash proceeds=40000

Liability element b/f-37792
effective interest rate 8%(37792*8%)-3023
Cash coupon pay-(2400)
liability element c/f-38415

calculate diluted Eps

Tax rate -20%
profit for the year 14327(after making adjustments draft pofit before interest and tax)

Earnings on dilution
basic-14327

Add intrest back(3023*80%)-2418

Shares on dilution
Existing 50000

Conversion(40000*20%)=8000

DIluted eps=16745/58000=0.29

1st example-conversion procedure(because it is share options that is why?)why we did not take into account this example like tax rate as the below example?
Shares on dilution
Existing-10000
Conversion(2000*4/5)-1600

2nd example conversion procedure (because it is convertible loan note that is why?)and why convertible loan note is multiplied 20%tax rate-this part still is unclear for me?
Shares on dilution
Existing 50000
Conversion(40000*20%)=8000

could you explain it to me please?

| QUOTE May 23, 2017 at 4:11 pm
Profile photo of MikeLittle
MikeLittle

Keymaster
Because there’s nothing is a statement of profit or loss relating to options

But there IS loan interest as a pre-tax deduction where the dilution relates to convertible loans

So, on conversion, the entity will no longer have to pay loan interest and that means the profit figure would be higher so the tax figure would also be higher

What equivalent affect on profits do options have? Correct! None

OK?

just looking at what u wann try to say:(?

I really did not understand((((

| QUOTE May 23, 2017 at 8:27 pm
Profile photo of MikeLittle
MikeLittle

Keymaster
Is your question “Why do we deduct tax in the first example but not in the second?

Both examples are dealt with in exactly the same way! I don’t see where you have identified a difference

Read the chapter on EPS in the free course notes again and see if it makes any more sense to you

Then come back to me if you need to

I meant they have different way of calculating conversion process but i found it

Barwell had 10 million ordinary shares in issue throughout the year ended 30 June 20×3.On 1 July 20×2 it had issued $2 million of 6% convertible loan stock, each $ 5 of loan stock convertible into 4 ordinary shares on 1 July 20×6 at the option of the holder.

Barwell had profit after tax for the year 30 june 20×3 $1850 it pays tax on profit at 30%

1st example-conversion procedure(because it is share options that is why?)why we did not take into account this example like tax rate as the below example?
Shares on dilution
Existing-10000
Conversion(2000*4/5)-1600

i) Triage Co issued 400,000 $100 6% convertible loan notes on 1 April 20X5. Interest is payable annually in arrears on 31 March each year. The loans can be converted to equity shares on the basis of 20 shares for each $100 loan note on 31 March 20X8 or redeemed at par for cash on the same date. An equivalent loan without the conversion rights would have required an interest rate of 8%.

2nd example conversion procedure (because it is convertible loan note that is why?)and why convertible loan note is multiplied 20%tax rate-this part still is unclear for me?
Shares on dilution
Existing 50000
Conversion(40000*20%)=8000or 40000*20 shares/100$=8000 yes?