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MikeLittle.
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- May 23, 2017 at 3:18 pm #387624
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 $1850 it pays tax on profit at 30%
Solution
Shares on dilution
Existing-10000
Conversion(2000*4/5)-1600Earning on Dilution
BAsic -1850
Add interest back(2000*6%*70%)-84
Diluted EPS=1934/11600=0.167
The question has been taken from 6 september 2016 past paper
Trial balance at 31 March 20×6
Equity shares of 1$-50000
6%convertible loan note-40000The 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 $1 receivable at the end of each year, based on discount rates of 6% and 8%, are:End of year
6% ————-8%
1)0·94——-0·93
2)0·89——0·86
3)0·84——0·79Pv principal(400*100$*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=40000Liability element b/f-37792
effective interest rate 8%(37792*8%)-3023
Cash coupon pay-(2400)
liability element c/f-38415calculate diluted Eps
Tax rate -20%
profit for the year 14327(after making adjustments draft pofit before interest and tax)Earnings on dilution
basic-14327Add intrest back(3023*80%)-2418
Shares on dilution
Existing 50000Conversion(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)-16002nd 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%)=8000could you explain it to me please?
May 23, 2017 at 4:11 pm #387629Because 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?
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