Page 198 - FR Integrated Workbook 2018-19

Chapter 14

Example 5

DEPS – Convertibles

Robert had 6,000 ordinary shares in issue throughout the year to
31 December 20X3.

At that date Robert also had in issue $5,000 convertible loan stock with an
effective rate of interest of 10%. Robert’s rate of income tax is 30%.

The loan is convertible into ordinary shares on the basis of 60 shares per
$100 loan.

Robert’s earnings for the year to 31 December 20X3 were $1,200.

Required:

Calculate Robert’s diluted earnings per share for the year to
31 December 20X3.

Solution

Basic number of shares 6,000
60
Conversion: $5,000 × / $100 3,000
———

Adjusted number of shares 9,000
———

$ $
Basic earnings 1,200
Notional interest saved: $5,000 × 10% 500

Tax @ 30% (150)

——— 350
———
1,550

———

Diluted earnings per share = 1,550 ÷ 9,000 = 17.2¢

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