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    The document contains 3 problems related to calculating basic and diluted earnings per share (EPS). Problem 1 involves a company with convertible bonds outstanding. It asks the reader to calculate basic EPS, diluted EPS given the bond details, and diluted EPS if the bonds were outstanding for part of the year. Problem 2 involves a company with 2 types of preference shares, one of which is convertible. It asks the reader to calculate basic and diluted EPS. Problem 3 involves a company with stock options outstanding. It asks the reader to calculate basic and diluted EPS, and considers whether the options would be dilutive if the stock price changed.

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    Brief Exercises for EPS

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    The document contains 3 problems related to calculating basic and diluted earnings per share (EPS). Problem 1 involves a company with convertible bonds outstanding. It asks the reader to calculate basic EPS, diluted EPS given the bond details, and diluted EPS if the bonds were outstanding for part of the year. Problem 2 involves a company with 2 types of preference shares, one of which is convertible. It asks the reader to calculate basic and diluted EPS. Problem 3 involves a company with stock options outstanding. It asks the reader to calculate basic and diluted EPS, and considers whether the options would be dilutive if the stock price changed.

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    108 views4 pages

    Brief Exercises For EPS

    Uploaded by

    anon_225460591
    The document contains 3 problems related to calculating basic and diluted earnings per share (EPS). Problem 1 involves a company with convertible bonds outstanding. It asks the reader to calculate basic EPS, diluted EPS given the bond details, and diluted EPS if the bonds were outstanding for part of the year. Problem 2 involves a company with 2 types of preference shares, one of which is convertible. It asks the reader to calculate basic and diluted EPS. Problem 3 involves a company with stock options outstanding. It asks the reader to calculate basic and diluted EPS, and considers whether the options would be dilutive if the stock price changed.

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    of 4

    INTERMEDIATE FINANCIAL ACCOUNTING 2

    EARNINGS PER SHARE BRIEF EXERCISES


    Problem 1 – Diluted EPS with Convertible Bonds
    In 2019, PT ABC reported net income amounting to Rp10.000.000. Throughout the
    year, 30.000 ordinary shares and 10.000 preference shares (each with Rp2.000
    nominal value and 8% cumulative dividend) were outstanding. Since 2018, there
    were convertible bonds with total nominal value of Rp20.000.000 outstanding. The
    bonds can be converted into 10.000 ordinary shares. The following are information
    related to the bonds:
    Bonds Payable Rp25.000.000
    Share Premium – Conversion Equity 2.000.000
    Interest Expense 250.000

    Assume that the effective tax rate is 20%.


    Instructions:
    a. Calculate basic EPS.
    b. Calculate diluted EPS.
    c. Calculate diluted EPS if the bonds were outstanding since July 2019 and if the
    interest expense balance was Rp125.000.

    Problem 2 – Diluted EPS with Convertible Preference Shares


    PT DEF’s net income in 2019 amounted to Rp50.000.000. The company had two
    types of preference shares:
     10%, non-convertible preference shares, each with Rp1.000 nominal value,
    10.000 shares outstanding; and
     8%, convertible preference shares, each with Rp1.500 nominal value, 10.000
    shares outstanding. The shares can be converted into 5.000 ordinary shares.
    Both types of preference shares were issued in 2015. Moreover, the company
    declared and paid dividends for both shares. Meanwhile, during 2019, 20.000
    ordinary shares were outstanding.
    Instructions:
    a. Calculate basic EPS.
    b. Calculate diluted EPS.
    Problem 3 – Diluted EPS with Options
    PT GHI’s reported net income in 2019 was Rp100.000.000. During 2019, there were
    20.000 ordinary shares outstanding. Rp10.000.000 dividends for preference shares
    were declared and paid during the year.
    The only potentially dilutive instruments issued by the company are options. 5.000
    options were issued in 2018 to purchase the company’s shares at Rp1.000 exercise
    price. The market price of shares during 2018 was Rp1.250.
    Instructions:
    a. Calculate basic EPS.
    b. Calculate diluted EPS.
    c. If the market price of shares was Rp800, would the options be dilutive?
    Explain what the implications on EPS calculation would be.
    ANSWER KEY
    Problem 1 – Diluted EPS with Convertible Bonds
    a. Basic EPS
    Net income−Preference dividends
    Basic EPS=
    Weighted−average shares outstanding

    Rp 10.000 .000−(8 %∗Rp2.000∗10.000)


    Basic EPS= =Rp280
    30.000

    b. Diluted EPS
    Net income−Preference dividends+ Interest savings(net of tax)
    Diluted EPS=
    Weighted−average shares outstanding + Potentialissuance

    Rp 10.000.000−Rp 1.600.000+(Rp 250.000∗( 1−20 % ) )


    Diluted EPS= =Rp 215
    30.000+10.000

    c. Diluted EPS (if the bonds were outstanding since July 2019):
    Rp 10.000.000−Rp 1.600.000+(Rp125.000∗( 1−20 % ) )
    Diluted EPS= =Rp 242,86
    10.000∗6
    30.000+( )
    12

    PROBLEM 2 – Diluted EPS with Convertible Preference Shares


    a. Basic EPS
    Rp 50.000 .000−( 10 %∗Rp 1.000∗10.000 ) −(8 %∗Rp 1.500∗10.000)
    Basic EPS=
    20.000

    Rp 50.000 .000−Rp 1.000 .000−Rp 1,200.000


    ¿ =Rp 2.390
    20.000

    b. Diluted EPS
    Rp 50.000.000−Rp 1.000.000
    Diluted EPS= =Rp 1.960
    20.000+5.000

    PROBLEM 3 – Diluted EPS with Options


    a. Basic EPS
    Rp 100.000 .000−Rp 10.000.000
    Basic EPS= =Rp 4.500
    20.000

    b. Diluted EPS
    Proceed from options exercised Rp5.000.000 (5.000 x Rp1.000)
    Market price of shares Rp1.250
    Treasury shares purchased 4.000 (Rp5.000.000 /
    Rp1.250)
    Shares issued for options 5.000
    exercised
    Incremental shares 1.000

    Rp 100.000.000−Rp 10.000.000
    Diluted EPS= =Rp 4.285,71
    20.000+1.000

    c. If the market price of shares was Rp800…


    Proceed from options exercised Rp5.000.000 (5.000 x Rp1.000)
    Market price of shares Rp800
    Treasury shares purchased 6.250 (Rp5.000.000 / Rp800)
    Shares issued for options 5.000
    exercised
    Incremental shares (1.250)

    Rp 100.000.000−Rp 10.000.000
    Diluted EPS= =Rp 4.800
    20.000−1.250

    Since the options are antidilutive, they are excluded from EPS calculation.
    Hence, the basic EPS would instead be titled “basic and diluted EPS”.

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