Question

Financial Reporting (Answer is require on immegiate basis)

Q.No.5: The financial statements of AGS Batteries Ltd. are showing 250,000 outstanding ordinary shares of Rs. 10 each as at June 30, 2016. The company issued following convertible preference shares on July 1, 2015:                                                                          (Marks 10)

• 12%, 25,000 preference shares of Rs. 100 each convertible in three years' time, with following conversion rights:
  • 3 ordinary shares for each convertible preference share by June 30, 2016
  • 2 ordinary shares for each convertible preference share by June 30, 2017
  • 1 ordinary share for each convertible preference share by June 30, 2018

• 8%, 200,000 preference shares of Rs. 50 each convertible in one year's time at the rate of 2 ordinary shares for each convertible preference share.

During the year, the company also issued options to offer 50,000 shares for Rs. 15 each. The average fair value of the share is Rs. 20 per share. Profit attributable to ordinary shareholders is Rs. 625,000 for the year ended June 30, 2016. The rate of income tax is 33%.

Required:

1. Calculate basic and diluted earnings per share (EPS) for the year ended June 30, 2016.
2. Which of the above preference shares are dilutive?

Answer 1

Answe (i)

Basic EPS = Net profit attributable to ordinary shareholder / Outstanding Ordinary Shares

As of June 30, 2016, outstanding ordinary shares = 250,000 shares

Profit = Rs. 625,000

Therefore, Basic EPS = 625,000 / 250,000 = Rs. 2.5 per share

Diluted EPS = Net Profit / (Outstanding Ordinary Shares + Diluted Shares)

As of June 30, 2016, profit = Rs. 625,000 and outstanding ordinary shares = 250,000 shares

Now we need to calculate Diluted Shares.

Let us consider all 25,000 preference shares were converted to ordinary shares in 2016.

Therefore, no. of diluted shares = preference shares converted + options issued

Preference shares converted = (25,000 x 3) + (200,000 x 2) = 475,000 shares

Options issued during the year = 50,000

Therefore, no of diluted shares = 475,000 + 50,000 =

Diluted EPS = 625,000 / (250,000 + 525,000)

Therefore Diluted EPS = Rs. 0.8064 per share.

Ans (ii)

In the given question, the 8% 200,000 preference shares of Rs. 50 each are dilutive. Due to these shares, other ordinary shareholders are received less EPS.