Question

COVID Ltd reported a net income after tax of $2 850 000 for the year ended 30 June 2019. The capital structure of COVID Ltd follows:

	30 June 2018	30 June 2019
Ordinary shares	500 000	500 000
Convertible preference shares ($3 dividend per share; convertible to 10,000 shares)	10 000	10 000
8% Convertible notes ( convertible to 30,000 ordinary shares)	$ 1000 000	$ 1000 000

COVID Ltd paid its preference shareholders during the year and there are non-dividends in arrears. All potential ordinary shares were outstanding on 1 July 2018. The company's tax rate is 30%.

Given that basic earnings per share are 570 cents, what are the diluted earnings per share for COVID Ltd?

Answer 1

Formula: Diluted earnings per share = Net income + interest on convertible notes after tax common shares outstanding+shares from assumed conversion of preferred stock + shares from assumed conversion of notes =($2,880,000+$5,600)/(500.000 + 10,000+30,000) = $2,885,600/540,000 Diluted earnings per share for COVID ltd = $5.34 per share Note: Amount of dividend paid to ordinary shareholders = 500.000 shares *$5.7 per share= $2,850,000 Preference dividend=10,000 shares *$3 per share=$30,000 Net income = $2,850,000+$30,000 = $2.880,000 After tax interest on convertible notes = $100.000*8 %*(1-0.3) =$5,600