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Hi Mr. MikeLittle
Can you explain to me why they have divided 15/20?
We know that when we have a right issue we have divided the Market price (FV) before right issue by the amount of TERP. we only restate and divided reversed of this amount to the previous year but it was said that during the period shares were issued.
Thanks for attentionOh, I am sorry.
Brand Co has the following results for the year ended 31 December 20X7.
Net profit for year $1,200,000
Weighted average number of ordinary shares outstanding during year 500,000 shares
Average fair value of one ordinary share during the year $20.00
Weighted average number of shares under option during year 100,000 shares
The exercise price for shares under option during the year $15.00
Required
Calculate both basic and diluted earnings per share.And I suppose that you’re looking at the effect of the option shares on the dilution
Examples 3 and 5 in Chapter 21 of the free course notes covers this topic
When the directors take up their options, that will raise cash of 100,000 shares @ $15 each = $1,500,000
If Brand had wished to raise $1,500,000 during the year, Brand could have issued “XXX” shares @ $20 each
So “XXX” = 75,000 shares
Do you accept that 75,000 @ $20 (ie full market price) + 25,000 FREE shares is the equivalent of 100,000 shares @ $15 each?
But we know already (at least, we should know already!) that shares issued at full market price have no affect on the earning capacity of existing shares
So, in our Brand example, it’s only the free shares that are diluting
You say that the answer has “divided ‘something’ by 15/20”
I don’t know which way “they” have performed the necessary calculation but it would seem that “they” have, in fact, multiplied by 15/20 to arrive at the equivalent number of shares issued at full market value
Thus we have 100,000 option shares * $15 exercise price / $20 full market price = 75,000
Incidentally, your original post suggests that you think that this is a rights issue problem
It isn’t!
Better?
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