Bhavik Chokshi www.benchmarxacademy.

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BENCHMARX ACADEMY
BHAVIK CHOKSHI
{CA (FINAL AIR 41), CS (CSFC AIR 21), CFA (USA)}

DILUTED EPS IN CASE OF MULTIPLE POTENTIAL

EQUITY SHARES

CONTACT US – 9082810221/ 7977299310

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ORDER OF SOLVING IN CASE OF MULTIPLE POTENTIAL EQUITY SHARES

Steps
1. Calculate incremental EPS for each potential equity share
Incremental EPS = Cost of Saving
No. of shares / free element
2. Rank the securities in the ascending order of incremental EPS i.e. the most dilutive
securities are ranked first.
3. Solve for dilutive EPS on a step-by-step cumulative basis by including one potentially
convertible security at a time in order of ranking.
4. If the resultant EPS falls then the security is dilutive, but if it rises, the security is anti-
dilutive, and the diluted EPS will be calculated by ignoring that security.

Example

PAT for Equity Shareholders (after deducting preference dividend) – 100,000

WANES – 10,000
12% preference shares – Rs. 10,000 (1 preference share converts to 0.1 equity
share)
(FV Rs. 10 each)
2% debentures – Rs. 10,000 (1 debenture converts to 1 equity share)
(FV Rs. 10 each)
Solution
Incremental EPS
a. 12% Pref Shares = 1200
100
= 12 ……………..Rank II
b. 2% debenture = 200
1000
= 0.2 …………….. Rank I

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Particulars Numerator Denominator EPS

Basic EPS 100,000 10,000 10

(+) Debentures 200 1000

100,200 11,000 9.11 (Dilutive)

(+) Preference 1,200 100

Shares

101,400 11,100 9.14 (anti-dilutive)

And therefore, since 9.14 > 9.11, preference shares are anti-dilutive securities. Therefore,
diluted EPS = 9.11

Question 1
(b). The following information is available relating to Space India Limited for the
Financial Year 2019-2020.

Net profit attributable to equity shareholders Rs 90,000

Number of equity shares outstanding 16,000
Average fair value of one equity share during the year Rs 90
Potential Ordinary Shares:

Options 900 options with exercise price of Rs 75

Convertible Preference Shares 7,500 shares entitled to a cumulative
dividend of
Rs 9 per share. Each preference share is
convertible into 2 equity shares.
Applicable corporate dividend tax 8%
10% Convertible Debentures of Rs 10,00,000 and each debenture is
Rs 100 each convertible into 4 equity shares
Tax rate 25%

You are required to compute Basic and Diluted EPS of the company for the
Financial Year 2019-2020.
Solution
(a) (i) Basic Earnings per share
Year ended
31.3.2020
Net profit attributable to equity shareholders (A) Rs 90,000
Number of equity shares outstanding (B) 16,000
Earnings per share (A/B) Rs 5.625

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(ii). Diluted earnings per share

Options are most dilutive as their earnings per incremental share is nil. Hence, for
the purpose of computation of diluted earnings per share, options will be
considered first. 10% convertible debentures being second most dilutive will be
considered next and thereafter convertible preference shares will be considered
(as per W.N.).

Net profit No. of Net Profit

attributable equity attributabl
to shares e per
equity share
shareholder Rs
s
Rs
Net profit attributable to equity 90,000 16,000 5.625
shareholders
Options 150
90,000 16,150 5.572 Dilutive
10% Convertible debentures 75,000 40,000
1,65,000 56,150 2.939 Dilutive
Convertible Preference Shares 72,900 15,000
2,37,900 71,150 3.344 Anti-Dilutive

Since diluted earnings per share is increased when taking the convertible
preference shares into account (Rs 2.939 to Rs 3.344), the convertible preference
shares are anti- dilutive and are ignored in the calculation of diluted earnings per
share for the year ended 31 March 2020. Therefore, diluted earnings per share
for the year ended 31 March 2020 is Rs 2.939.

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Working Note:
Calculation of incremental earnings per share and allocation of rank

Increas Increas Earnings Rank

e in e in per
earnin number of increme
gs equity ntal
shares share
(1) (2) (3) = (1) ÷ (2)
Rs Rs
Options
Increase in earnings Nil
No. of incremental shares issued
for no consideration 150 Nil 1
[900 x (90-75)/90]
Convertible Preference Shares
Increase in net profit attributable 72,900
to equity shareholders as adjusted
by attributable dividend tax
[(` 9 x 7,500) + 8% (Rs 9 x 7,500)]
No. of incremental shares (2 15,000 4.86 3
x 7,500)
10% Convertible Debentures
75,000

40,000 1.875 2
Increase in net profit
[(Rs 10,00,000 x 10% x (1 –
0.25)]
No. of incremental shares
(10,000 x 4)

Note: Grossing up of preference share dividend has been ignored here. At present
dividend distribution tax has been abolished. However, the question has been solved on
the basis of the information given in the question.