Question

Week 9 Alps Ltd has a net income after tax of $1 500 000 for the year ended 30 June 2019. At the beginning of the period Alps Ltd has 900 000 fully paid-up ordinary shares on issue. On 1 December 2018 Alps Ltd had issued a further 300 000 fully paid-up ordinary shares at an issue price of $2.00. On 1 March 2019 Alps Ltd made a one-for-six 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 Alps Ltd also had 500 000, $1.00, 8% 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 2018 was $1.50 per share.

Required: a) Calculate the basic EPS amount for 2019 and provide the adjusted comparative EPS for 2018. b) Explain what is diluted EPS. Give one example of a security that can dilute the basic EPS. (2 marks, maximum 300 words)

Answer 1

Basic EPS for 2019
Net Income after tax	1,500,000
Less: Preference dividend	-40,000
Net Income for Equity Shareholders	1,460,000
Beginning shares	900,000
Fresh Issue (300,000 X 7/12)	175,000
Bonus Issue (900,000 + 300,000) X 1/6	200,000
Weighted average shares	1,275,000
BEPS	1.15

Earning in 2018 (1.50 X 900,000)	1,350,000
Shares in 2018 (900,000 + 900,0000 / 6)	1,050,000
Adjusted BEPS	1.29

b)

Diluted EPS = Diluted EPS is a sort of a test of quality of a company's earnings per share if all convertible securities were converted to equity shares.

An example would be Convertible debentures and convertible preferential shares