FM – Need urgent help with study hub question.

Hello,

I was attempting the ACCA study hub questions and came across a question that I got wrong. The provided solution didn’t make sense to me so I was hoping to get some clarity on it.

Thanks in advance,

Question:

Beaver Co has 100 million equity shares in issue and has just reported profit for the year of $55m.

A new issue of 50 million equity shares at an issue price of $1.50 is being considered. All proceeds would be used to redeem a bank loan with an annual cost of 8%.

Beaver Co pays income tax at a rate of 20%.

Assume that operating profit remains constant.

If the equity issue goes ahead and the bank loan is redeemed, what will be the new earnings per share figure?

A.$0.399
B.$0.367
C.$0.598
D.$0.388

Answer provided:

The correct answer is A.

New profit for the year = $55m + ($50m × $1.50 × 0.08 × (1 ? 0.2)) = $59.8m

New earnings per share = $59.8m/(100m + 50m) = $0.399