ExpertMedium2 marksMultiple Choice
ACCA · Question 12 · Earnings Per Share
Section A
Alpha Co has 10 million ordinary shares in issue. During the year, it had $5 million of 6% convertible bonds outstanding. The bonds are convertible into 2 million ordinary shares. The tax rate is 20%. Basic earnings for the year were $15 million.
What is the diluted earnings per share (EPS)?
Section A
Alpha Co has 10 million ordinary shares in issue. During the year, it had $5 million of 6% convertible bonds outstanding. The bonds are convertible into 2 million ordinary shares. The tax rate is 20%. Basic earnings for the year were $15 million.
What is the diluted earnings per share (EPS)?
Answer options:
A.
$1.25
B.
$1.27
C.
$1.28
D.
$1.50
How to approach this question
Calculate adjusted earnings by adding back the post-tax interest saved. Calculate adjusted shares by adding the maximum number of convertible shares. Divide adjusted earnings by adjusted shares.
Full Answer
B.$1.27✓ Correct
To calculate diluted EPS under IAS 33, adjust earnings for the post-tax interest saved if the bonds were converted: $5,000,000 * 6% * (1 - 0.20) = $240,000. Adjusted earnings = $15,240,000. Adjusted shares = 10m + 2m = 12m. Diluted EPS = $15,240,000 / 12,000,000 = $1.27.
Common mistakes
Adding back the pre-tax interest instead of post-tax interest.
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