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Aqua has correctly calculated its basic earnings per share (EPS) for the current year.
Which of the following items need to be additionally considered when calculating Aqua’s diluted EPS for the year?
(i) A 1 for 5 rights issue of equity shares during the year at $1·20 when the market price of the equity shares was
$2·00
(ii) The issue during the year of a convertible (to equity shares) loan note
(iii) The granting during the year of directors’ share options exercisable in three years’ time
(iv) Equity shares issued during the year as the purchase consideration for the acquisition of a new subsidiary
company
A All four
B (i) and (ii) only
C (ii) and (iii) only
D (iii) and (iv) onlyThe answer is C. I chose A, as far as i have learnt than a new share issue will also dilute the shares?
Many thanks
You’re correct, it does, because of the ‘free’ element within the share issue
However, that rights issue is part of the ordinary calculation of the basic earnings per share and is fully dealt with within that basic calculation
You selected ‘all four’
How does option (iv) affect diluted earnings per share? It doesn’t
But convertible loans and directors’ options certainly do
Think of it like this and maybe it will help
The dilution calculation is effectively trying to show what would be the effect on TODAY’s eps if TOMORROW’s events took place today
OK?
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