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Hello,
I was attempting the ACCA study hub questions and came across a question that I got wrong. The provided solution didn’t make sense to me so I was hoping to get some clarity on it.
Thanks in advance,
Question:
Beaver Co has 100 million equity shares in issue and has just reported profit for the year of $55m.
A new issue of 50 million equity shares at an issue price of $1.50 is being considered. All proceeds would be used to redeem a bank loan with an annual cost of 8%.
Beaver Co pays income tax at a rate of 20%.
Assume that operating profit remains constant.
If the equity issue goes ahead and the bank loan is redeemed, what will be the new earnings per share figure?
A.$0.399
B.$0.367
C.$0.598
D.$0.388Answer provided:
The correct answer is A.
New profit for the year = $55m + ($50m × $1.50 × 0.08 × (1 ? 0.2)) = $59.8m
New earnings per share = $59.8m/(100m + 50m) = $0.399
Calculate the new earnings (profit after tax)
You start with profit – $55 million.The interest on the bank loan that will be redeemed is calculated as 50 * 1.5 * 0.08 = 6
Tax so 6 * 0.8 = 4.8
New earnings after tax 55 + 4.8 = 59.8Total of shares in issue 100m + 50m = 150m
Then 59.8/150m = 0.399
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