Question

Alps Ltd has a net income after tax of $1 500 000 for the year ended 30 June 2019. At the beginning of the period Alps Ltd has 900 000 fully paid-up ordinary shares on issue. On 1 December 2018 Alps Ltd had issued a further 300 000 fully paid-up ordinary shares at an issue price of $2.00. On 1 March 2019 Alps Ltd made a one-for-six bonus issue of ordinary shares out of retained earnings. The last sale price of an ordinary share before the bonus issue was $2.50. At the beginning of the current period Alps Ltd also had 500 000, $1.00, 8% cumulative preference shares on issue. The dividends on the preference shares are not treated as expenses in the statement of comprehensive income. The basic earnings per share for the period ended 30 June 2018 was $1.50 per share.

Required:

a) Calculate the basic EPS amount for 2019 and provide the adjusted comparative EPS for 2018.

b) Explain what is diluted EPS. Give one example of a security that can dilute the basic EPS. (2 marks, maximum 300 words)

Answer 1

Answer (a)

Basic EPS of year 2019 = $1.145

Adjusted Basic EPS 2018 = $1.2857

Explanation

Answer (b)

To calculate diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares.

A potential equity share is a financial instrument or other contract that entitles, or may entitle, its holder to equity shares. Examples:

• Debt instruments or preference shares that are convertible into equity shares
• share warrants

Potential equity shares should be treated as dilutive when, and only when their conversion to equity shares would decrease net profit per share from continuing ordinary operations.

Good Luck!