Question

Week 9

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

Diluted EPS--

Diluted EPS means EPS calculated taking the affect of probable future conversion of convertible instruments into comman stock.

Basic concept is to check the future viability of current EPS, whether company has some of instruments which will be converted to comman shares consequently the net income available for equity shareholders will be changed and total no. of shares used in denominator will also be change.

Example, suppose a company have 6%convertible bonds mandatory convertible. Then in some time it will be converted and the net income will be increased by 6% of bond value and the total number of shares will be increased by bond converted. This will fluctuate the current EPS.

for current year EPS Please find the attached image.

Bonus fraction is always assumed to be issue from beginning of year.

Please comment for any query or assistance or additional explanation.

Thanks,