Craven Ltd has 10,000,000 ordinary shares on issue at the beginning of the year,1 July 2003.These shares were issued at $0.50 each and have a current market value of $3.00.On 1 November 2003,Craven Ltd bought back 1,000,000 ordinary shares originally issued at $0.50 for $1.90 each.On 1 February 2004,1,500,000 shares were issued fully paid up at the current market value of these shares.Also during the period,500,000 partly paid-up ordinary shares were issued.They were issued on 1 April 2004 at an issue price of $2.90.These shares were partly paid to $1.80.The partly paid shares are permitted proportionate rights to vote and receive dividends based on the relationship between the amount paid up and the issue price. Craven Ltd has 3,000,000,$1.00 preference shares that provide cumulative dividends at a rate of 8 per cent.
For the year ended 30 June 2004,the net income after tax was $20,000,000.
What are the basic earnings per share for Craven Ltd for the year ended 30 June 2007?

Question

Quizplus · Accepted Answer

To calculate the basic earnings per share, we need to divide the net income after tax by the weighted average number of ordinary shares outstanding during the year.

Weighted average number of ordinary shares outstanding during the year can be calculated as follows:

10,000,000 shares * 3/12 + 9,000,000 shares * 3/12 + 10,500,000 shares * 3/12 = 9,875,000 shares

- 10,000,000 shares were outstanding for the first 3 months (July-Sept)
- 1,000,000 shares were bought back on 1 Nov, so for the remaining 9 months (Nov-June) there were only 9,000,000 shares outstanding
- On 1 Feb, 1,500,000 shares were issued, so for the remaining 5 months (Feb-June) there were 10,500,000 shares outstanding

Basic earnings per share = Net income after tax / Weighted average number of ordinary shares outstanding

= $20,000,000 / 9,875,000 shares

= $2.03 per share

However, the partly paid-up shares also have a right to receive dividends based on the amount paid up, so the fully paid-up equivalent number of shares needs to be calculated:

500,000 * ($2.90 - $1.80) / $2.90 = 258,620

So the fully paid-up equivalent number of shares is 10,500,000 + 258,620 = 10,758,620

Therefore, the basic earnings per share for Craven Ltd is:

= $20,000,000 / 10,758,620 shares

= $1.86 per share (rounded to the nearest cent)

Since this answer is not given, the closest option is C) $1.96.

Craven Ltd Has 10,000,000 Ordinary Shares on Issue at the Beginning