Question

At 31 December 2021 Wyndhams calculated its basic earnings per share as 30 pence per share, based on earnings of £900,000 and 3 million £1 ordinary shares. It has a tax rate of 25%. In addition to the ordinary shares, Wyndham has £3m of 4% convertible loan stock. This is convertible any time from 1 January 2021 – 31 December 2022 at a rate of 1 ordinary share for each £5 of loan stock. None had been converted by the year end.

a) Calculate the diluted EPS for year ended 31 December 2021. Answer to one decimal place

Wyndhams issued £2m 8% convertible preference shares on 1 January 2021, convertible between January 2024 and January 2025 at a rate of 1 ordinary share per £5 of preference shares.

b) Combine the information on the convertible loan stock and the convertible preference shares to calculate the diluted EPS for year ended 31 December 2021

Answer 1

a)

Diluted EPS for year ended 31 December 2021 if loan stock is converted:

The earnings of the company are £900,000 and number of £1 ordinary shares is 3 million.

Amount of 4% convertible loan stock is £3,000,000.

Conversion ratio is 1 ordinary share for each £5 of loan stock or 1/5.

If converted, the number of shares issued for 4% convertible loan stock will be =

No. of Shares If Converted = Convertible Loan Stock + Conversion ratio

= 3,000,000 × 1/5

= 600,000

Total shares after dilution are = 3,000,000+ 600,000 = 3,600,000.

Therefore, Diluted EPS =

Diluted EPS = Net Earnings/No. of Diluted Shares

= 3,600,000/3,600,000

= 0.25

Diluted EPS for year ended 31 December 2021 is 25 pence per share.

The basic EPS has been calculated on the earnings of £900,000. Therefore, this amount is after tax as the basic EPS is calculated on the income after tax. Hence the information about tax rate has not been used.

 

b)

Diluted EPS for year ended 31 December 2021 after including convertible preference

shares:

Amount of convertible preference shares is £2,000,000. Conversion ratio is 1 ordinary share for each £5 of preference shares or 1/5.

If converted, the number of shares issued for preference shares will be =

No. of Shares If Converted - Convertible Pref. shares + Conversion ratio

-2,000,000 x 1/5

= 400,000

Total shares after this dilution are = 3,600,000 + 400,000 = 4,000,000.

Therefore, Diluted EPS =

Diluted EPS = Net Earnings/No. of Diluted Shares

= 900,000/4,000,000

= 0.23

Or 22.5 pence per share without rounding

Fully Diluted EPS is 22.5 pence per share if both loan stock and preference shares are converted.

Fully Diluted EPS is the EPS after taking into account the effect of all the dilutions.

a. Diluted EPS for year ended 31 December 2021 is 25 pence per share.

b. Fully Diluted EPS is 22.5 pence per share if both loan stock and preference shares are converted.