Calculation of diluted eps

Question

Special Plc has an issued share capital at 1 January 2019 of 1,000,000 ordinary shares of 20p each and 50,000 convertible preference shares of £1 each. The preference shares are classified as equity receiving a dividend of £2.50 per share. These shares are convertible in 2025 on the basis of one ordinary share for one preference share. 

There is also loan capital of 10% convertible loan of £250,000. The loan is convertible in 2028 on the basis of 500 ordinary shares for each £1,000 of loan, and the tax rate is 40%. 

Earnings after tax for the year ended 31 December 2019 are £5,000,000. 



Required: 

1. Calculate the diluted EPS for 2019. 
2. Calculate the diluted EPS assuming that the convertible preference shares were receiving a dividend of £6 per share instead of £2.50.

Answer 1

EPS, or earnings per share is net income less preferred shares' dividends divided by total shares outstanding (diluted shares outstanding in this case) OR

(Net Income-Preferred Dividends)/Diluted Shares Outstanding

For Problem 1: the Numerator is

5,000,000-(2.50*50,000)=4,875,000

The denominator for the diluted shares outstanding is all the common stock plus the converted shares from the loan, plus the convertible preferred shares.

For the loan, that would be 500 shares per $1,000 of the loan of a $250,000 loan. That's 500, for 250 $1000s or 125,000 shares.

For the preferred stock, that's a 1 to 1 ratio so that's simply 50,000 shares

1,000,000+ (250,000*500/1000)+(50,000*1/1)=1,000,000+125,000+50,000=1,175,000

So for problem 1, the diluted EPS is 4,875,000/1,175,000 Or 4.15 Euros

For problem 2, we are just changing the numerator.

5,000,000-(6*50,000)=4,700,000

Diluted EPS would be 4,700,000/1,175,000 or 4 Euros