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.

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

A. £4.15

B.£4

Explanation:

A. Calculation for the diluted EPS for 2019

Using this formula

2019 Diluted EPS =(Earnings after tax for the year ended-Preferred Dividends)/Total Diluted Shares Outstanding

Let plug in the formula

2019 Diluted EPS=[£5,000,000-(£2.50 per share*50,000)/£1,000,000+ (£250,000*500/£1,000)+(50,000*£1)]

2019 Diluted EPS=[£5,000,000-(£2.50 per share*50,000)/£1,000,000+ (£250,000*0.5)+(50,000*£1)]

2019 Diluted EPS=[(£5,000,000-£125,000)/(£1,000,000+£125,000+£50,000)]

2019 Diluted EPS=£4,875,000/£1,175,000

2019 Diluted EPS=£4.15

Therefore 2019 Diluted EPS (Earning per share) will be £4.15

B. Calculation for the diluted EPS assuming that the convertible preference shares were receiving a dividend of £6 per share instead of £2.50.

Diluted EPS=[£5,000,000-(£6 per share*50,000)/£1,000,000+ (£250,000*500/£1,000)+(50,000*£1)]

Diluted EPS=[£5,000,000-(£6 per share*50,000)/£1,000,000+ (£250,000*0.5)+(50,000*£1)]

Diluted EPS=[(£5,000,000-£300,000)/(£1,000,000+£125,000+£50,000)]

Diluted EPS=£4,700,000/£1,175,000

Diluted EPS=£4

Therefore the Diluted EPS (Earning per share) will be £4

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