Question

Compaq Ltd has a net income after tax of $2 000 000 for the year ended 30 June 2018. At the beginning of the period Compaq Ltd has 900 000 fully paid-up ordinary shares on issue. On 1 January 2018 Compaq Ltd had issued a further 300 000 fully paid-up ordinary shares at an issue price of $2.00. On 1 March 2018 Compaq Ltd made a one-for-five 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 Compaq Ltd also had 500 000, $1.00, 5% 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 2017 was $1.50 per share.

Required: a) Calculate the basic EPS amount for 2018.

b) Explain what is diluted EPS. Give one example of a security that can dilute the basic EPS.

Answer 1

Earning per share(EPS)

Eps is the triggering ratio that provide how much amount of profit is available to equity or ordinary shares of the enterprise

There are mainly two type of EPS

1- Basic EPS

2- Diluted EPS

Basic EPS

= Net profit or loss available to ordinary share holders   

   Weighted average number of ordinary shares issued

A) Net profit or loss available to ordinary share holders

Net profit after Tax             (A)	Given in question	$2000000
Less: dividend on 5% Cumulative preference shares               (B)	($500000x5%)	$25000
Amount available to ordinary shares(A-B)		$1975000

       

B) Weighted average number of ordinary shares issued

shares at the beginning	900000x12/12=900000
Shares issued on January 2018	300000x6/12=150000
Bonus issue (see assumption)	240000x12/12=240000
Total weighted average number of shares	900000+150000+240000	1290000

Basic EPS

= $1975000

   1290000

= $1.531/ share

   Assumption : As per Accounting standard Bonus issue is made with out getting any inflow of money or asset to the capital base, the issue is considered as if it were happened in the beginning of the year 2017 -2018     

       Diluted EPS

It will be calculated in addition to the basic earnings per share if there is POTENTIAL ORDINARY SHARES(which are now in another form of instrument) and it will dilute the earning if they are getting converted into ordinary shares.

In short Dilutive shares will decrease the earnings available to ordinary shares before their conversion into ordinary shares.

Example : convertible bond or debenture convertible preference shares etc.

                       DEPS =    Net profit after adjusting diluted earnings

Average number of shares including diluted shares