Chapter 6 Chapter 6

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(c) Assuming that total earnings remain the same, calculate the effect of the
issue on primary earning per share (i) before conversion and (ii) on a fully
diluted basis.
(d) If profit after taxes increase by Rs. 1m, what will be primary
earning per share (i) before conversion and (ii) on a fully diluted basis. (Nov.
2009 SFM)
Answer :
(a) Conversion value = current market price x conversion ratio = 21 x 2 = 42
(b) Conversion premium = current market price of convertible preference share
– conversion value = 50 – 42 = 8
% conversion premium = (8/42) x 100 = 19.05%
(c) EPS before conversion:
EAT 15,00,000
Preference Dividend 1,40,000
Earnings available to equity 13,60,000
shareholders
No. of equity shares 5,00,000
EPS 2.72
EPS after conversion:
EAT 15,00,000
Earnings available to equity 15,00,000
shareholders
No. of equity shares 5,00,000 + 80,000 = 5,80,000
EPS 15,00,000 / 5,80,000 = 2.59
(d) EPS before conversion:
EAT 15,00,000 + 10,00,000 = 25,00,000
Preference Dividend 1,40,000
Earnings available to equity 23,60,000
shareholders
No. of equity shares 5,00,000
EPS 4.72
EPS before conversion:
EAT 15,00,000 + 10,00,000 = 25,00,000
Earnings available to equity 25,00,000
shareholders
No. of equity shares 5,00,000 + 80,000 = 580,000
EPS 4.31