Exam question paper December 2009, question 5, part (b)

Eenes7814y ago

Hi
In the exam question paper December 2009, question 5, part (b) the DEPS is calculated as 34.1 c. I get 32.8 c. In the answer to the question they are calculating the adjusted no. of shares using the weighted average no. of shares (i.e. 43.25 m shares as a result of the rights issue) plus the conversion of shares. In my answer I used the total no. of shares after the rights issue (i.e. 45 m shares) plus the conversion shares. I agree to the calculations of the conversion shares and the adjusted earnings. However, I believe we should not use the weighted average number of shares as a result of the rights issue when calculating the adjusted number of shares for DEPS and we should be using the total number of shares after the rights issue instead. My reasons for this are:

(1) The total number of shares after the rights issue is a “real” number of shares, and not an average; and

(2) The difference between calculated EPS and DEPS according to the solution is only 0.6 c (EPS: 34.7 c less DEPS: 34.1), which is too law if you think of the details of the convertible loan notes. Here I get the difference between EPS and DEPS 1.9 c (EPS: 34.7 less DEPS 32.8 C), which I believe is more realistic.

To support my grounds, I refer to the exam question paper June 2006 question “Torrent”, part (b). In the answer to this question they used the total number of shares after the rights issue in order to calculate adjusted number of shares for the purposes of DEPS, and they have not been using the weighted average number of shares as a result of the rights issue.

So, finally, my question is:
Why are they using the weighted average number of shares from the rights issue when calculating adjusted number of shares for the purposes of DEPS in the exam question no. 5, part (b) from December 2009???

Former user14y ago#1

I also have problem on this question. My question is:-
(1)The answer to this question shown that the weighted average no. of shares is calculated as:
[36m x 3/12 x $3.80/$3.60] + [45m x 9/12] = 43.25m
Why need multiply by ($3.80/$3.60)??
(2) The answer to this question shown that the adjusted earnings is calculated as:
[15m + (10m x 8% x 75%] = $15.6m
Why need multiply by 75%, is this related to income tax??
(3) I totally don't understand the calculation of comparative EPS

Can anyone help me to settle my problem? Thanks.

Rrichieinspain14y ago#2

Hi,

cph85
1) After we find the theoretical rights price (£3.60) We multiply by 3.80/3.60 as this is part of the standard process. I don't know why we do this but it must always be done i.e. it is not specific just to this question.

2)yes the 75% is the income tax adjustment. A better way to understand it would be do increase earnings by the interest (£800,000) on the nominal value of the convertible loan (i.e. £10,000,000) and deduct from earnings the tax on the interest i.e. £800,000 x 25%

3) I don't really understand why we calculate comparatives as we do however by inverting £3.80/£3.60 so it becomes £3.60/£3.80 has always worked for me when dealing with right issues.

enes78
This is a good question. Kaplan seem to imply that we use the weighted average as IAS 33 dictates that we do. I don;t know why the 2006 paper did it differently but it could be that the IAS was amended. If it's any consolation I have worked through a lot of recent and amended practice questions and they all seem to have used the weighted average
This is a good question. Again the book doesn't

Former user14y ago#3

Hi, richieinspain. Thanks for your explanation.

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