Question 6
As at 31 December 20x1 Pear Ltd. has 2,000,000 ordinary shares outstanding and profit attributable to ordinary shareholders for the period is MU15,000,000. Pear Ltd. has 100,000 convertible preference shares with a par value of MU100 with holders entitled to a cumulative dividend of MU10 per share. Each preference share is convertible into two ordinary shares.
What is diluted earnings per share for 31 December 20x1?
Diluted earnings per share for 31 December 20x1 is MU7.27 {[MU15,000,000 + [(100,000 x MU100) x (MU10 ÷ MU100)]] ÷ [2,000,000 + (100,000 x 2)]}
Diluted earnings per share for 31 December 20x1 is MU7.80 which is calculated as {[MU15,000,000 + (100,000 x MU10)] ÷ [2,000,000 + (100,000 ÷ 2)]}
Diluted earnings per share for 31 December 20x1 is MU6.83 {[MU15,000,000 - [(100,000 x MU100) x (MU10 ÷ MU100)]] ÷ [2,000,000 + (100,000 ÷ 2)]}
Diluted earnings per share for 31 December 20x1 is MU7.27, which is calculated as follows:
{[MU15,000,000 + [(100,000 x MU100) x (MU10 ÷ MU100)]] ÷ [2,000,000 + (100,000 x 2)]
This calculation takes into account the dilutive effect of the convertible preference shares. The conversion of these preference shares into ordinary shares increases the number of shares outstanding, and adjusts the profit attributable to ordinary shareholders by adding back the dividend that would have been paid to the preference shareholders had they not converted their shares. The calculation assumes that all 100,000 convertible preference shares would convert into 200,000 ordinary shares (as each preference share converts into two ordinary shares) and that the cumulative dividend of MU10 per share would have been paid on these preference shares if they had not been converted.
