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    Assignment 5 - Solutions

    Uploaded by

    Esther Liu
    This document contains solutions to two questions regarding the calculation of basic and diluted earnings per share (EPS). For question 1, it provides the calculation of basic EPS for 2021 as $6.941 per share. It then tests for dilution from convertible preference shares and stock options, finding the stock options to be most dilutive. The calculation of diluted EPS is shown as $6.014 per share. Question 2 calculates basic EPS for 2020 as $0.530 per share. It tests convertible preference shares, stock options, and convertible bonds for dilution, finding stock options to be dilutive. The calculation of diluted EPS is shown as $0.517 per share.

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    Assignment 5 - Solutions

    Uploaded by

    Esther Liu
    57 views2 pages
    This document contains solutions to two questions regarding the calculation of basic and diluted earnings per share (EPS). For question 1, it provides the calculation of basic EPS for 2021 as $6.941 per share. It then tests for dilution from convertible preference shares and stock options, finding the stock options to be most dilutive. The calculation of diluted EPS is shown as $6.014 per share. Question 2 calculates basic EPS for 2020 as $0.530 per share. It tests convertible preference shares, stock options, and convertible bonds for dilution, finding stock options to be dilutive. The calculation of diluted EPS is shown as $0.517 per share.

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    This document contains solutions to two questions regarding the calculation of basic and diluted earnings per share (EPS). For question 1, it provides the calculation of basic EPS for 2021 as $6.941 per share. It then tests for dilution from convertible preference shares and stock options, finding the stock options to be most dilutive. The calculation of diluted EPS is shown as $6.014 per share. Question 2 calculates basic EPS for 2020 as $0.530 per share. It tests convertible preference shares, stock options, and convertible bonds for dilution, finding stock options to be dilutive. The calculation of diluted EPS is shown as $0.517 per share.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    57 views2 pages

    Assignment 5 - Solutions

    Uploaded by

    Esther Liu
    This document contains solutions to two questions regarding the calculation of basic and diluted earnings per share (EPS). For question 1, it provides the calculation of basic EPS for 2021 as $6.941 per share. It then tests for dilution from convertible preference shares and stock options, finding the stock options to be most dilutive. The calculation of diluted EPS is shown as $6.014 per share. Question 2 calculates basic EPS for 2020 as $0.530 per share. It tests convertible preference shares, stock options, and convertible bonds for dilution, finding stock options to be dilutive. The calculation of diluted EPS is shown as $0.517 per share.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    ACCT3103 - Intermediate Financial Accounting II

    Assignment 5- Solutions

    Question 1
    Basic earnings per share:
    Period Shares outstanding Stock split fraction of year WANOS
    Jan1 to Jul 31 46,000 1.2 7/12 32,200
    Aug 1 to Aug 31 51,000 1.2 1/12 5,100
    Sep 1 to Oct 31 61,200 2/12 10,200
    Nov1 to Dec31 58,200 2/12 9,700
    WANOS 57,200

    Earnings = $415,000 – Preference shares dividend (6,000 x $6 x 6/12) = $397,000


    Basic EPS (2021) = $397,000 / 57,200 = $6.941

    Dilution test
    $6 Convertible preference shares
    Increase in earnings = 6,000 x $6 x 6/12= $18,000
    Increase in shares = 6,000 x 3 x 1.2 x 6/12 = 10,800
    Incremental EPS = $24,000 / 10,800 = 1.667 (less than Basic EPS ==> dilutive)

    Stock options: Average market price $36 > Exercise price $ 30 (dilutive)

    Rank for dilution (from the most dilutive to the least dilutive)
    1. Stock options
    2. $6 Convertible preference shares

    Diluted earnings per share:


    Earnings WANOS EPS
    Basic $397,000 57,200 $6.941
    Stock option
    Ordinary share assumed issue
    = 5,000 x 1.2 6,000
    Less: Ordinary share assumed
    repurchase = 5,000 x 30/36 x 1.2 = (5,000)
    Incremental share = 1,000 0 1,000
    397,000 58,200 $6.821
    $6 Convertible preference shares 18,000 10,800
    415,000 69,000 $6.014

    Diluted EPS (2021) should be $6.014.


    Question 2
    1. Basic EPS
    Net income $6,500,000
    Less: Dividends requirement on $1.2 cumulative preference share (1,200,000)
    Net income identified with ordinary share $5,300,000

    Basic EPS (2020) = $5,300,000 ÷ 10,000,000 = $0.530

    2. Test for dilution


    Stock options
    Exercise price ($15) is less than the applicable market price ($18 average market price for second
    half of the year for the unexercised options)  Dilutive.

    Convertible preference shares


    Contribution per share = (1,000,000  $1.2) ÷ (1,000,000  2) = $0.6.
    Contribution is greater than the $0.53 basic EPS  Antidilutive.

    Convertible bonds
    Contribution per share = ($5,000,000  7%  .75) ÷ (5,000  100) = $262,500 ÷ 500,000 = $0.525
    Contribution is less than the $0.53 basic EPS  Dilutive.

    3. Diluted EPS
    Earnings WANOS EPS
    Basic EPS $5,300,000 10,000,000 $0.530
    Stock options
    No. of shares assumed issued(3m x 6/12) 1,500,000
    Less: No. of shares assumed to be repurchased
    ($3m x $15/ $18 x 6/12) (1,250,000)
    No. of new shares to be issued 250,000 250,000
    $5,300,000 10,250,000 $0.517

    *It is NOT necessary to continue the computation beyond the stock option, since the EPS at
    this point ($0.517) is less than the incremental EPS impact of the convertible bond ($0.525).

    Diluted EPS (2020) should be $0.517.

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