ExpertHard2 marksMultiple Choice
ACCA · Question 10 · Earnings Per Share
SECTION A
Beta Co had 5,000,000 ordinary shares in issue on 1 January 20X4. On 1 April 20X4, it made a 1-for-5 rights issue at $1.20 per share. The market value of the shares immediately before the rights issue was $1.80. Beta Co's profit after tax for the year ended 31 December 20X4 was $2,500,000.
What is the basic Earnings Per Share (EPS) for the year ended 31 December 20X4? (Round to the nearest cent)
SECTION A
Beta Co had 5,000,000 ordinary shares in issue on 1 January 20X4. On 1 April 20X4, it made a 1-for-5 rights issue at $1.20 per share. The market value of the shares immediately before the rights issue was $1.80. Beta Co's profit after tax for the year ended 31 December 20X4 was $2,500,000.
What is the basic Earnings Per Share (EPS) for the year ended 31 December 20X4? (Round to the nearest cent)
Answer options:
A.
42 cents
B.
45 cents
C.
43 cents
D.
50 cents
How to approach this question
1. Calculate the Theoretical Ex-Rights Price (TERP). 2. Calculate the bonus fraction (Market price before issue / TERP). 3. Calculate the weighted average number of shares, applying the bonus fraction to the period before the rights issue. 4. Divide profit by the weighted average shares.
Full Answer
C.43 cents✓ Correct
TERP = ((5 shares * $1.80) + (1 share * $1.20)) / 6 shares = $1.70. Bonus fraction = $1.80 / $1.70. Weighted average shares: Jan-Mar (3 months) = 5,000,000 * 3/12 * ($1.80/$1.70) = 1,323,529. Apr-Dec (9 months) = 6,000,000 * 9/12 = 4,500,000. Total weighted average shares = 5,823,529. Basic EPS = $2,500,000 / 5,823,529 = $0.429 or 43 cents.
Common mistakes
Failing to calculate the bonus fraction, or applying the bonus fraction to the entire year instead of just the period before the rights issue.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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