Question

Question Three On 1 July 2010 BNM, a listed entity, had 5,000,000 $1 ordinary shares in issue. On 1 September 2010, BNM made a 1 for 2 bonus issue from retained earnings. On 1 February 2011 BNM issued 3,000,000 $1 ordinary shares for $4.10 each, which was their full market price. BNM generated profit after tax of $3.8m for the year ended 30 June 2011. The basic earnings per share for the year ended 30 June 2010 was 48.2 cents. At 1 July 2010 the ordinary shareholders of BNM held options to purchase 1,000,000 $1 ordinary shares at $3.10 per share. The options are exercisable between 1 July 2012 and 30 June 2014. No further options were issued in the year. The average market value of one $1 ordinary share of BNM during the year ended 30 June 2011 was $4.00. Required: (c) Explain why it is important for users to have diluted earnings per share presented in the financial statements. (2 marks)

Suggested approach

The key to answering this well is to separate which info is required for the basic eps calculation and which is relevant for the diluted eps – something that is often confused in answers. The time weighted average of shares in part (a) is crucial and this is where candidates should spend a good bit of time. It is vital that candidates use information from part (a) in part (b) to illustrate understanding.

Answer

Subject name: F2

Exam sitting: November 2011

Question number: Q3c (2 marks)