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?
A. 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)]}
B. 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)]}
C. 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 MU6.83, which is calculated as follows:
{[MU15,000,000 - [(100,000 x MU100) x (MU10 ÷ MU100)]} ÷ {2,000,000 + (100,000 ÷ 2)}
This calculation takes into account the dilutive effect of the convertible preference shares by adjusting the profit attributable to ordinary shareholders for the dividend payable on those shares and adding the potentially dilutive shares from the convertible preference shares (assuming conversion into 200,000 ordinary shares) to the denominator for the diluted earnings per share calculation.
