Task 2: Diluted earnings per share of Thai company (option)

Net profit Ordinary Per

attributable shares (A) share Share options
Profits for year 2,142,000
LESS: preference share dividends -14,000 Exercise price is 1.10
Profits attributable to ordinary share holders 2,128,000 600,000 3.55 Average mkt price = 1.08
Exercise price > average market price
Employee share options 0 11,852 Not dilutive - exclude
2,128,000 611,852 3.48

Employee share options

Facts Exercise price is Euros 0.92

Option: shares or cash
(i) 80,000 employee share options exercise price 0.92 on 1 April 2006 Advantageous to holder = shares
Two bases for converting: ordinary shares or take 1.00 cash per share - advantageous to holder = shares - shares priced 1.08 v. 0.92 exercise price
(ii) Average market price for ordinary shares for 2003 1.08 - cash equivalent to 1.00 per share
(iii) 100,000 share options exercise price 1.10 on 1 September 2007 - anti-dilutive - quick sell gives: 86,400
(iv) Ordinary shares at start of period 600,000 - cash option gives: 80,000
(v) 200,000 10% $1 preference shares Dilutive: exercise price < ave market price

30% Tax rate (checked on internet, realistic tax rate) 2 contracts:

(i) (80,000 x 0.92) / 1.08 = 68,148
Wrong answers (ii) Diff from 80,000 = 11,852

A. Choose cash option for Employee share options 80,000 0

2,208,000 600,000 3.68

B. Include share options and include employee share options 0 -1,852

2 contracts: 2,128,000 610,000 3.49
(i) (100,000 x 1.10 ) / 1.08
(ii) Diff from 100,000

C. Forget to deduct preference share dividends 2,142,000 611,852 3.50

D. Exclude employee share options and include share options 2,128,000 598,148 3.56

E. Don't treat as 2 contracts: add 80,000 shares 2,128,000 1,400,000 1.52

F. Treat as 2 contracts but don't divide by mkt price 2,128,000 606,400 3.51
Suggested workings for Ratanakosin Ltd

Net profit Ordinary Per

attributable shares (A) share
Profits for year 2,142,000
LESS: preference share dividends (14,000)
Basic earnings per share 2,128,000 600,000 3.55

Share options are anti-dilutive - exclude. 0 0

Exercise price > market price

Employee share options 0 11,852

Treat as 2 contracts:
- Contract 1: (80,000 x 0.92) / 1.08 = 68,148 exclude
- Contract 2: 80,000 - 68,148 = 11,852

Diluted earnings per share 2,128,000 611,852 3.48

Task 3: Diluted earnings per share of Egyptian Company

Earnings per Earnings per

Correct answer Net profit Ordinary incremental Per Incorrect answer Net profit Ordinary incremental Per
attributable shares share share attributable shares share share
Profits for year 2,369,000 Profits for year 2,369,000
LESS: after tax preference shares -17,400 LESS: after tax preference shares -30,000
Profits for ordinary shareholders 2,351,600 1,000,000 2.35 2.35 Profits for ordinary shareholders 2,339,000 1,000,000 2.34 2.34

Contract for services Contract for services

Contract for services 0 100,000 Contract for services 0 100,000
Time weighting factor 0.60 2,339,000 1,100,000 2.13
Adjusted contract for services 0 59,726 0.00
Loan contract REMOVED
2,351,600 1,059,726 2.22 Loan contract - cash option
2,339,000 1,100,000 2.13

Incorrect answer assumes:

Pref share dividends deducted before tax

No time weighting on contract of services

REMOVED
Loan contract
Loan contract - cash option
2,351,600 1,059,726 2.22

Facts

(i) E£1,500,000 5% loan which can be settled in cash or 500,000 ordinary shares in 2005 at lender's option - REMOVED LOAN CONTRACT
(ii) Contract to pay for E£400,000 services in either cash or 100,000 ord shares at the Eflatoun's option on 7 Aug 2003, year contract
(iv) E£1 preference shares E£300,000 10% throughout 2003
(v) E£1 ordinary shares 1,000,000
(vi) Tax rate 42%
Contract for services
Loan contract REMOVED
Entity's option - assume shares
Lender's option - which is most dilutive? 100,000 shares will be issued
Shares option most dilutive Potential ordinary shares until 7 Aug 03
But lender cash short, so selects cash option Actual option taken is cash option
Time-weighting factor required (7Aug-31Dec removed)
Suggested feedback for Eflatoun Company Adjust preference share dividends
for tax = 30,000 x (1-42%)

Earnings per Earnings per

Corrections to Bill's answer Net profit Ordinary incremental Per Bill's incorrect answer Net profit Ordinary incremental Per
attributable shares share share attributable shares share share
Profits for year 2,369,000 Profits for year 2,369,000
LESS: after tax preference shares (17,400) LESS: after tax preference shares (30,000)
Profits for ordinary shareholders 2,351,600 1,000,000 2.35 2.35 Profits for ordinary shareholders 2,339,000 1,000,000 2.34 2.34

Contract for services Contract for services

Contract for services 0 100,000 Contract for services 0 100,000 0.00
Time weighting factor 0.60 2,339,000 1,100,000 2.13
Adjusted contract for services 0 59,726 0.00

2,351,600 1,059,726 2.22

Time-weight contract for services'

shares to only include the potential
ordinary shares until 7 August 2005.
Suggested feedback for Figari Inc

Net profit Ordinary Per

attributable shares share
Profits for year 43,753,000
LESS: after tax preference shares (1,950,000)
Basic earnings per share 41,803,000 1,000,000 41.80

New stores contingency

Conditions satified? Yes
Assume Dec 15 is end of contingency 0 50,000
41,803,000 1,050,000 39.81

NASDAQ contingency
Conditions satisfied? No
Assume issued at start of period 0 0
Diluted earnings per share 41,803,000 1,050,000 39.81