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 30^th 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 1^st 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 30^th June 2019 and by 8% in the sector of its newly acquired operations.

On 1^st 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 30^th 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

Formula: Diluted EPS = Profit after tax + Interest(1-tax)/(Number of shares Outstanding+ Shares Converted on dilution) (Amount in $'000) Profit after tax From 30.06.2018 30.06.2019 Existing Operations 1250 1325 Newly Acquired Operations 450 486 Profit after tax 1700 1811 Interest(1-tax) 280 280 1)PAT + Int(1-tax) 1980 2091 Shares Outstanding 30.06.2018 30.06.2019 Common Shares 12 Million 12 Million Convertible Debentures 50,000 50,000 Shares on Conversion 2 Million 2 Million (40 Shares per Debenture) Options Conversion Shares 1.2 Million Nil 2)Total Number of Shares 15.2 Million 14 Million Diluted EPS(1/2) 0.1303 0.1494 Note: Exercise Price of Options $1 No.of Options 2 Million Average market Price $2.5 No.of Shares can be bought 0.8 Million (@ Market Price)=$2/2.5 Incremental Shares(2-0.8) 1.2 Million