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x has 5 million ord shares of 25 cents each in issue
In 2004 he issue
– $1 million of 14% convert loan stock convertible in 3 yr time at rate of 2 shares per $10 of stock
– $2 million of 10% convert loan stock convertible in 1 yr time at rate of 3 shares per $5 of stock
Total earnings in 2004 $1750 ooo
Rate of income tax 35%
Calculate basic eps and diluted eps
Kindly provide explanation and solution to this questionThnk you for helping
EPS= earning / number of shares = 1750 /5000 = 35c
DEPS calculation for convertible loans:
DEPS = (Earnings + notional extra earnings) / (Number of shares + notional extra shares)
= [1750 + 1000 x 14% x (100% – 35%) + 2000 x 10% x (100%-35%)] /
[5000 + (1000/10 x 20) + ( 2000/5 x 3)]= 30.8c
Further explanation ( I might be wrong as I am also learning):
There are two convertibles in your questions but the calculation to the notional extra earnings and notional extra number of shares should be the same.
Notional extra earning is the interest earned from the convertible less tax. Hence the 1st set of convertible has a notional extra earning of 1000 x 14% x (100%-35%) = 91; and the 2nd set of convertible 2000 x 10% x (100%- 35%) = 130.
Notional extra shares is calculated based details given on the question. For this particular question, it says 2 shares per $10 for the 1st convertible loan and 3 shares per $5 for the second.
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