Question 1 (EPS) The following summarised information is available in relation t
ID: 2535977 • Letter: Q
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.
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
Explanation / Answer
(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
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