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For the following question below, i’m not able to get the correct answer. Can you help me to check where i went wrong.
Qn) Meta Ltd has the following capital structure :
50 cents ordinary shares = $4000
Retained earnings = $5000
Total = $9000The company has a return on ordinary shareholders funds of 10% and this level of return is expected to continue after a forthcoming 1 for 4 rights issue at $1.20 per share.
What will be the earnings per share in cents, following the rights issue ?
Answer: 11.4 cents
My workings:
Dividend payout = 10% x 5000 = 500
Profit after tax
= Retained earnings – dividends paid
= 5000 – 500
= 4500Number of new shares
= (8000 shares / 4) ×1
= 2000 sharesEPS after rights issue
= PAT – preference dividend /no.shares in issue
= 4500 / 10 000 shares
= 45 centsDoes your book not show the workings? (If it does not then you really should be using a Revision Kit published by one of the ACCA approved publishers!)
The current shareholders funds are 4000 + 5000 = 9000
The new shareholders funds will be 9,000 + (2,000 x 1.20) = 11,400.
10% of this is 1,140, and since there will be 10,000 shares in issue, the EPS will be 11.4 cents.
Okay i think i misinterpreted the question earlier. So the return on shareholders fund was actually referring to the earnings right, not the dividends ?
Correct.
(If it was just dividends it would be referred to as the dividend yield)
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