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JUNE 2009 – JJG CO
part b (ii) : Effects of rights on EPS:
Although it is quite simple, but I tried one thing:
Let me know if this is correct. I did because ROE take estimate of earnings available to investors funds. There was not any effect on interest and tax of rights so I simply added $4.35m to $5.5m ie $9.85m. Then 2m rights + current share of 5.5m, gave me $1.31/share.Rights $15m x ROE( 29%) = $4.35m retrun on equity
It is added to current earnings $5.5 + $4.35 = $9.85/5.5+2m shares = $1.31/shareThe alternative way( may be standard):
$5.5/5.5+2m shares = $0.73/shareMany Thanks
The problem with your way is that you are assuming that the money raised will be earning.
No doubt it will be earning (although depending on how it is invested it might earn more or less that 29%).
However, the question asked you to calculate it on the assumption that expansion of the business had not begun. Therefore you were expected to assume the earnings stayed at the are currently.Ok good point. Ratio questions are too much tricky, I feel stars in front of my eyes whenever I am doing it 🙂
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