Question

3. (a) On January 1, 2015, Williamson Corporation had 600,000 ordinary shares outstanding. Additional issues of shares during the year were:

Mar 1 Issued 300,000 shares

May 1 Issued 100,000 shares

July 1 Issued a 25% share dividend

Oct 1 Purchased 200,000 shares

Nov 1 Issued a 2-for-1 share split

Also on January 1, 2015, the company issued $1,000,000 of 8 year, 7% convertible bonds at par. Each $400 bond is convertible into 20 ordinary shares. The interest expense on the liability component of the convertible bonds for the year was $80,000.

The ordinary shares sold at an average market price of $20 per share during the period. 90,000 warrants were outstanding that could be exercised to purchase one ordinary share for $8 for each warrant exercised.

150,000 preference shares were outstanding, $50 par, 6% cumulative, not convertible. Williamson’s net income in 2015 was $3,500,000 and its tax rate was 30%. Instructions

(i) Calculate the earnings per share for 2015.

(ii) Calculate the diluted earnings per share for 2015.

(b) A junior accounting clerk is uncertain as to when to include share warrants in the calculations for EPS. In order for him to understand the concept, briefly explain what dilutive securities are, why they are included in the EPS calculation, and why some securities are antidilutive and thus not included in the calculation. Use an illustration in your answer.

Answer 1

		COMMON SHARES
		Beginning balance	600,000
		May 1 issued	300,000
		May 1 issued	100,000
		Oct1 purchase of shares	(200,000)
		Balance on Oct1	800,000
		Nov 1, 2:1 split	800,000
		Total number of shares oitstanding as on Nov1	1,600,000
		Weighted Average Outstanding=(1600000+2*600000)/2	1,400,000
	A	Net Income of 2015	$3,500,000
	B=A*(1-0.3)	After tax income	$2,450,000	(3500000*(1-0.3)
	C	Less:Preference dividend($50 par,6% cumulative )	$        450,000	(150000*50*0.06)
	D=B-C	Amount available to common shareholders	$2,000,000
	E	Number of Shares outstanding(weighted average)	1,400,000
	F=D/E	Basic Earning Per Share(EPS) 2015	$               1.43
		CALCULATION OF DILUTED EPS
	G	Convertible debt interest=1000000*0.07	$          70,000
	H=G*(1-0.3)	After vtax convertible debt interest=70000*(1-0.3)	$          49,000
	I	Number of shares dilution(1000000/400)*20) through bond	50000
	J	Number of warrants	90000
	K=J*8	Amount raised if warrants are exercised(8*90000)	$        720,000
	L=K/20	Number of shares that can be purchased from market	36,000
	M	Number of shares to be issued if warrants are exercised	90000
	N	Number of shares dillution (M-L) through warrants	54,000
	P=I+N	Total dillution of shares	104,000
	Q=P+E	Total number of dillued shares outstanding	1,504,000
	R=D+H	Earning of common shareholders	$2,049,000
	S=R/Q	Dilluted EPS(Earning Per share) 2015	$               1.36
	(b)	Dilutive securities are securities which after allotment reduces earning per share
		of the existing shareholders. If some group of shareholders are alloted shares at less
		cost it affects the earning of the existing shareholders
		Hence , if warrants are converted to shres at less than market price
		there will be dillution
		But, if market price is $20 and warrants are converted at a price higher than $20
		it will be anti dillutive and can be ignored