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Dear Lisa,
Please consider the question below and break down the “New earnings (profit after tax)” figure
It is extracted from the Quiz Section of the ACCA StudyHub (Chapter 19 – Ratio Analysis).THE QUESTION
Beaver Co has 100 million equity shares in issue and has just reported a profit, after tax, 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 corporation tax at a rate of 20%.
Assume that operating profit (profit before interest and tax) remains constant.
If the equity issue goes ahead and the bank loan is redeemed, what will be the new earnings per share figure?
THE SOLUTION
New earnings (profit after tax) = $55m + ($50m × $1.50 × 0.08 × (1 ? 0.2)) = $59.8m
New earnings per share = $59.8m/(100m + 50m) = $0.399
Take PAT, then look at the equity issue if it goes ahead and you redeem the bank loan what is the new EPS?
EPS as it stands is 55 add to (50m * 1.50 * 0.08 * 0.8 )= 59.8
So the PAT added to the equity used to redeem a bank loan costing 8% adjusted for tax 20%59.8 / (100 + 50) = 0.399
What is the new PAT 59.8
What are the new shares 150m in total
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