Question

Question 1 (EPS)

The following summarised information is available in relation to ‘La Scan’, a publicly listed company in Australia:

Statement of comprehensive income extracts for years ended 30th June:

	2018		2017
	Continuing	Discontinued	Continuing	Discontinued
	$’000	$’000	$’000	$’000
Profit after tax from:
Existing operation	2,000	(750)	1750	600
Newly acquired operations*	450		nil

* Acquired on the 1st November 2017

Analyst expect profits from the market sector in which La Scan’s existing operations are based to increase by 6% in the year to 30th June 2019 and by 8% in the sector of its newly acquired operations.

On 1st July 2016 La Scan had:

$12 million of $1 ordinary shares in issue.

$5 million 8% convertible debentures 2023; the terms of conversion are 40 equity shares in exchange for each $100 of debenture.

On 1 January 2018 the directors of La Scan were granted options to buy 2 million shares in the company for $1 each. The average market price of La Scan’s shares for the year ending 30th June 2018 was $2.50 each.

Assume an income tax rate of 30% for year 2016,2017 and 2018

Required:

(i) Calculate La Scan’s estimated profit after tax for the year ending 30 June 2019 assuming the analysts’ expectations prove correct;

(ii) Calculate the diluted earnings per share (EPS) on the continuing operations of La Scan for the year ended 30 June 2018 and the comparatives for 2017.

Answer 1

(i)
La Scan
Statement of income for year ended 30th June 2019
Particulars	$’000
Continuing Operations	3,028	$2857 + $2857 x 6%
Newly acquired operations	694	$ 643 + $643 x 8%
Profit before tax	3,723
Less: Tax @ 30%	1,117
Profit after tax	2,606
Workings for Profit before tax
	Continuing Operations	Newly acquired operations
	$’000	$’000
Given Profit after Tax	2000	450
Profit before Tax worked as	2,857	643
for continuing operations $2000/70 x 30 = 857 + 2000 = 2857
For newly acquired business $ 450/70 x 30 = 193 + 450 = 643
(ii)
Earnings per share is worked out as follows -
	30-06-2018	30-06-2017
	$’000	$’000
Profit after tax
Continuing Operations	2000	1750
Discontinues Operations	-750	600
Newly acquired operations	450	0
Total Profit after tax                                                                                       (A)	1700	2350
Total Share Capital                                                                                           (B)	1,20,00,000	1,20,00,000
Earnings per share $	0.14	0.20
Now for diluted earnings per share
2 million open shares available to buy out from market                (C )	2000000
Available in market at $2.50
So possible shares to buy - 2 million divide by 2.50                         (D)	800000
So balance shares available in the market                                      (E= C-D)	1200000	0
Total Share Capital is                                                                                   (F = B+E)	1,32,00,000	1,20,00,000
Diluted earnings per share $                                                                      (A/F)	0.13	0.20
Workings
$1700 / 1 32 00 000 x 1000 = 0.13
$2350 / 1 20 00 000 x 1000 = 0.20