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On 1 January 2019, Colson Company had 200,000 ordinary shares outstanding with par value of $l...

On 1 January 2019, Colson Company had 200,000 ordinary shares outstanding with par value of $l each that originally issued at $18 per share. On 1 April 2019, 20,000 ordinary shares were issued at $25 per share and on 1 May, the company issued 5% bonus issue as stock dividend for both ordinary shares and preference shares.

During the year, 30,000 treasury shares were repurchased from the open market at $35 on 1 September 2019. On 1 March 2019, the company issued 200,000 9%, cumulative preference shares of par $1 per share.

Colson also issued $2,000,000 of 8% convertible bonds at face value during 2018 - each $1,000 bond is convertible into 50 ordinary shares. Top executives were granted 30,000 options to buy ordinary shares at the exercise price of $40 if the net income of the company can achieve over $450,000. The beginning and ending market price of the ordinary shares was $38 and $62 respectively during the year 2019.

Net income for the company was $500,000 in 2019, and the relevant corporate tax rate was 40%. At the financial year-end date of 2019, the company declared and paid $5 cash dividends to all ordinary shareholders.

Required: (Answers should be rounded to two decimal places)

(a) Calculate the basic earnings per share for 2019.

(b) Calculate the diluted earnings per share for 2019.

Solutions

Expert Solution

Assumptions: granted options has become excersisable as condtions attached has been satisfied but its assumed that the same has not been granted yet; hence not considered in Basic EPS calculation

1. Calculate the basic earnings per share for 2019

Earning before Tax and interest 500,000
Interest on Bond (8% x 2000000) 160000
Earning Before Tax 340,000
Tax (40% x 340000) 136000
Earning After Tax 204,000
Preference share Dividend (210000x $1x9%) 18900
Net income to equity share holder 185,100
Wighted Average Nos of ordinary Shares 216041
Basic EPS (216041/185100) 0.86

WN

Date Nos of day out standing Particular Nos of shares ordinary shares outstanding Weighted Average Nos of Shares
A B C D E F= B*D
01-Jan-19 365 opeing stock 200,000 200,000 200000
01-Apr-19 275 issue 20,000 220,000 15068
01-May-19 245 5% bonus issue (220000*5%) 11,000 231,000 11000
01-Sep-19 122 repurchased -30,000 201,000 -10027
216041
Nos of preference share issues 200,000
Stock dividend@ 5% 10,000 200000 * 5%
Nos of preference share outstanding 210000

(b) Calculate the diluted earnings per share for 2019.

Dilued Earning per share = (Net income to equity share holder + After tax interest on bond ) / Wighted Average Nos of ordinary Shares + conversion of bond into share + conversion of options

Net income to equity share holder 185,100
After tax interest on bond (160000*(1-0.4) 96000
Diluted Earning (A) 281,100
Wighted Average Nos of ordinary Shares                        216,041
Conversion of bond (2000,000*50/1000)                        100,000
Conversion of option (30000*(62-40)/62)                          10,645
Diluted Nos of share (B)                        326,686
Dilued Earning Per Share (A/B)                               0.86

ekkarill92 answered 2 years ago
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