ABC Ltd's basic earnings per share is $1.25 for the year ended 2012. The company has the following outstanding potential ordinary shares at the start of the year with the following information:

Average share price for ABC Ltd during the year is $1.80.
Which of the above potential ordinary shares is the most dilutive and least dilutive POS in accordance with AASB 133 "Earnings per Share", respectively?

Question

ABC Ltd's basic earnings per share is $1.25 for the year ended 2012. The company has the following outstanding potential ordinary shares at the start of the year with the following information:

Average share price for ABC Ltd during the year is $1.80.
Which of the above potential ordinary shares is the most dilutive and least dilutive POS in accordance with AASB 133 "Earnings per Share", respectively?

Quizplus · Accepted Answer

According to AASB 133, potential ordinary shares are considered dilutive if their conversion to ordinary shares would decrease the basic earnings per share.

To determine the dilution potential of each type of potential ordinary share, we need to calculate their impact on the earnings per share (EPS) calculation.

A) Convertible notes: Since the convertible notes have a fixed interest rate, they will decrease the EPS if converted into shares. Therefore, they are dilutive. Employee options: The exercise price of the employee options is $1.50, which is lower than the average share price of $1.80. If the employee options are exercised, the additional shares issued will dilute the EPS. Therefore, they are dilutive.

B) Executive options: The exercise price of the executive options is $2.00, which is higher than the average share price of $1.80. Therefore, if the executive options are exercised, there will not be any dilution in the EPS. Convertible notes: Same as above, convertible notes are dilutive.

C) Employee options: Same as above, employee options are dilutive. Convertible notes: Same as above, convertible notes are dilutive.

D) Preference shares: Preference shares do not affect EPS as they do not have any voting rights. Therefore, they are not dilutive. Executive options: Same as above, executive options are not dilutive.

E) Executive options: Same as above, executive options are not dilutive. Preference shares: Same as Above, preference shares are not dilutive.

Therefore, the most dilutive potential ordinary shares are convertible notes and employee options, and the least dilutive potential ordinary shares are executive options and preference shares. The best choice for the answer is C.

ABC Ltd's Basic Earnings Per Share Is $1