Question

The shareholders’ equity of Cameron Corp. as of 31 December 2016, the end of the current fiscal year, is as follows:

$1 cumulative preferred shares, no-par, convertible at the rate of 2-for-1; 270,000 shares outstanding $9,166,000

Common shares, no-par; 1,900,000 shares outstanding 16,600,000

Common stock conversion rights 247,000 Retained earnings   30,760,000

Additional information:

• On 1 July 2016, 182,000 preferred shares were converted to common shares at the rate of 2-for-1.
• During 2016, Cameron had convertible subordinated debentures outstanding with a face value of $4,160,000. The debentures are due in 2012, at which time they may be converted to common shares or repaid at the option of the holder. The conversion rate is 10 common shares for each $100 debenture. Interest expense of $191,000 was recorded in 2016.
• The convertible preferred shares had been issued in 2010. Quarterly dividends, on 31 March, 30 June, 30 September, and 31 December, have been regularly declared.
• The company’s 2016 net earnings were $2,321,000, after tax at 25%. Common shares traded for an average price of $34, stable in each quarter of the year.
• Cameron had certain employee stock options outstanding all year. The options were to purchase 440,000 common shares at a price of $30 per share. The options become exercisable in 2013.
• Cameron had another 116,000 employee stock options outstanding on 1 January 2016, at an exercise price of $38. They expired on 30 June 2016

Required:
1. Calculate the basic Earning Per Share. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

2. Calculate the Individual effects for preferred shares (converted), preferred shares, (unconverted) and debentures. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Individual Effects Preferred shares, converted Preferred shares, unconverted Debentures

3. Calculate the Diluted Earning Per Share. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

The question has been solved taking the individual parts separately :-

Q.1 Calculate the basic Earning Per Share. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

The company’s 2016 net earnings were = $2,321,000.

Common shares, outstanding = 1,900,000 shares

As we know :

Earnings per share or basic earnings per share is calculated by subtracting preferred dividends from net income and dividing by the weighted average common shares outstanding. The earnings per share formula looks like this.

Net Income(Profit or loss attributable to ordinary shareholders) = $2,321,000.

Preferred Dividends = Nil

(Note : The convertible preferred shares had been issued in 2010. Quarterly dividends, on 31 March, 30 June, 30 September, and 31 December, have been regularly declared -

This statement is given but it has not been given what is the amount of preference dividend hasn't been provided so it has been assumed that the amount of dividend has been declared and paid in entirity, therefore nothing has to be reduced)

Computation of Weighted average common share outstanding :

Particulars	Average Period (in months)	Weighted Average
Common shares	12	1,900,000 *12/12 = 1,900,000
Preference shares converted (Date of conversion 1 July 2016) No of shares issued = 182,000*2 = 264,000 (182,000 preferred shares were converted to common shares at the rate of 2-for-1) A 2 for 1 issue would mean you get two additional shares - for each preference shareyou hold in the company.)	6 Months (from 1 July to 31 December )	264,000*6/12 = 132,000
	Total Weighted average common share	2,032,000

Earnings per share = $2,321,000/2,032,000 = $1.1422

Therefore Earning per share is $ 1.14(Rounded off two decimal places)

Q.2. Calculate the Individual effects for preferred shares (converted), preferred shares, (unconverted) and debentures.

We know, EPS = NET Income / Total Weighted average common share

Particulars	Explanation	Required Compuatation and Effect
Preferred shares (converted)	If the number of ordinary shares outstanding changes, without a corresponding change in resources, then the weightedaverage number of ordinary shares outstanding during all periods presented is adjusted retrospectively for both basic and diluted EPS.	Since the figure of dividend has not been provided, then 1. There will be No effect on Numerator that is the earnings 2. The denominator would be increased by the number of shares as done above(in part 1 of this question).	EPS =  $2,321,000/2,032,000 = $1.1422 OR $1.14
Preferred shares (unconverted)	1. Since the figure of dividend has not been provided, There will be No effect on Numerator that is the earnings 2. The denominator would be increased by the maximum number of shares as per the conversion ratio (in part 1 of this question) Unconverted shares = 88,000 After conversion maximum shares that can be issued is 88,000 * 2 = 176,000	Effect on EPS : Net Income - Preference Dividend = $2,321,000 Weighted average common share = 1,900,000 + 176,000 = 2,076,000 EPS = $2,321,000 / 2,076,000 = $1.1180 OR $1.12
Debentures	Due to issue of shares in lieu of debt the post-tax effect of interest expense (which includes any amortisation of initial transaction costs and discounts accounted for using the effective interest method under IAS 39 Financial Instruments: Recognition and Measurement), which would have been saved from the assumed conversion of the convertible debt, net of the related tax effects	Post tax savings of interest would become additional income distributable to shareholders and hence would be added to Numerator i.e. Interest ( 1- tax rate ) Interest expense of $191,000 was recorded in 2016. = $191,000 (1- 0.25) = $143,250 Denominator Conversion rate is 10 common shares for each $100 debenture. Total Shares issued :- $4,160,000/100 * 10 = 416,000 shares	Individual Effect = $143,250/416,000 = $0.34435 or $0.34 Total Effect on EPS ($2,321,000+$143,250) / (2,032,000 + 416,000) = 2,464,250/2,448,000 = $1.0066 OR $1.007

Q.3. Calculate the Diluted Earning Per Share(DEPS). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

To calculate diluted EPS, profit or loss attributable to ordinary shareholders and the weighted-average number of shares outstanding during the period are adjusted for the effects of all dilutive POSs.

Formula for Diluted EPS

Consequential effect on profit or loss from assumed conversion of POSs (numerator adjustment) / Weighted-average number of outstanding POSs (denominator adjustment)

Particulars	Explanation	Numerator Adustment	Denominator Adjustment
Debentures	Post tax savings of interest would become additional income distributable to shareholders and hence would be added to Numerator	Additional income due to conversion is Interest ( 1- tax rate) Interest expense of $191,000 was recorded in 2016. = $191,000 (1- 0.25) = $143,250	Conversion rate is 10 common shares for each $100 debenture. Total Shares issued :- $4,160,000/100 * 10 = 416,000 shares
Options	Equity-settled share-based payment transactions For share-based payments that are classified as equity-settled under IFRS 2, the numerator should not be adjusted when calculating diluted EPS.	No effect on Numerator because no earnings arise due to conversion of options into shares.	Shares issuable at $30 Market Price is $34 Dilutive element = 440,000 * 30) / 34 = 388235 Dilutive element = 440000-388235 i.e 51,765 shares
Options expired on 30 june 2016 would be considered for 6 months	Shares issuable at $38 Market Price is $34 Dilutive element = Nothing since the market price is less compared to exercise price hence no dilution arises.

DEPS = 23,21,000 +143,250 / 2,032,000 + 51765 + 416,000 + 176,000

= 0.92095

or 0.92$

(Note :- The question has been solved taking IFRS standard IAS33 - Earnings per share as the base.)