Pilbarra Ltd has a profit after tax of $20,220,000 for the period ended 30 June 2005.Pilbarra Ltd also has $15,000,000 of 5 per cent cumulative preference shares.The dividends on the preference shares are not treated as expenses in the income statement. As at 1 July 2004 there were 12,000,000 fully paid ordinary shares issued.Pilbarra Ltd also has $6,000,000 in convertible debentures issued for the full year.It pays interest of 4.5 per cent per annum and could be converted to 3,000,000 ordinary shares at the option of the debenture-holders.There are also 900,000 share options currently on issue with an exercise price of $4.50.The average market price for ordinary shares during the year was $6.90.In addition to the preference shares mentioned above,Pilbarra Ltd also has 1,000,000,$1.00,4 per cent cumulative convertible preference shares that are convertible at the option of the entity.It is probable that these preference shares will be converted some time in the next period.The tax rate is 33 per cent.What are the diluted earnings per share for Pilbarra Ltd in accordance with AASB 133?

Question

Quizplus · Accepted Answer

1. Calculate the weighted average number of ordinary shares:

Number of ordinary shares outstanding as of 1 July 2004: 12,000,000

Weighted average number of ordinary shares as of 30 June 2005:

= 12,000,000 [12 months / 12 months]

= 12,000,000

2. Calculate the dilutive effect of the convertible debentures:

Amount raised through convertible debentures: $6,000,000

Interest paid on convertible debentures: $6,000,000 x 4.5% = $270,000

Interest saved if debenture holders convert to ordinary shares: $6,000,000 x 5.5% (i.e., market interest rate - coupon rate) = $330,000

Net dilutive effect of convertible debentures = ($330,000 - $270,000) / $6.90 = 8,696

Adjusted weighted average number of ordinary shares = 12,000,000 + 8,696 = 12,008,696

3. Calculate the dilutive effect of the share options:

Number of share options: 900,000

Exercise price: $4.50

Average market price during the year: $6.90

The share options are not dilutive because the average market price during the year ($6.90) is higher than the exercise price ($4.50).

4. Calculate the dilutive effect of the convertible preference shares:

Number of convertible preference shares: 1,000,000

Conversion price: $1.00

Market value of ordinary shares at conversion: $6.90

The convertible preference shares are dilutive because the market value of ordinary shares at conversion ($6.90) is higher than the conversion price ($1.00).

Potential dilutive ordinary shares through conversion of convertible preference shares = 1,000,000 x $1.00 / $6.90 = 144,928

5. Calculate diluted earnings per share:

Profit after tax: $20,220,000

Less: Preference share dividends: $15,000,000 x 5% = $750,000

Adjusted profit after tax: $20,220,000 - $750,000 = $19,470,000

Diluted earnings per share = $19,470,000 / 12,008,696 = $1.21.

Therefore, the answer is B.

Pilbarra Ltd Has a Profit After Tax of $20,220,000 for the Period