MAC3703 ASSIGNMENT 2 OF 2022 SEMESTER 1

MAC3703 ASSIGNMENT 2 – SEMESTER 1 OF
2022
QUESTION 1
(a) Basic earnings per share

R
Profit before tax 10 000
Less Taxation (10 000 * 28%) (2 800)
Earnings 7 200


Shares Adjustment Fraction of Weighted
Outstanding Factor the year Average
Shares
Shares in issue (1 January 2020 to 29 50 000 1.010526 8 421
February 2020)
Rights exercised on 1 March 2020 10 000
1 March 2020 to 30 April 2020 60 000 10 000
Fresh issue to purchase a new factory building
On 1 May 2020 10 000
1 May 2020 – 31 December 2020 70 000 46 667
65 088



Basic earnings per share = 𝐵𝑎𝑠i𝑐 𝐸𝑎𝑟𝑛i𝑛𝑔𝑠
W𝑒i𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠

7 200
=
65 088

= 𝑅0. 1106 𝑜𝑟 11. 06𝑐 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Rights issue

Theoretical ex rights value per share
=
𝐹𝑉 𝑜𝑓 𝑎𝑙𝑙 𝑡ℎ𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑i𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡ℎ𝑒 𝑒𝗑𝑒𝑟𝑐i𝑠i𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑟i𝑔ℎ𝑡+𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑐𝑒i𝑣𝑒𝑑 𝑓𝑟𝑜𝑚 𝑒𝗑𝑒𝑟𝑐i𝑠𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑟i𝑔ℎ𝑡𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑i𝑛𝑔 𝑏𝑒𝑓𝑜𝑟𝑒 𝑒𝗑𝑒𝑟𝑐i𝑠𝑒+𝑁𝑢𝑚𝑏𝑒𝑟 i𝑠𝑠𝑢𝑒𝑑 i𝑛 𝑡ℎ𝑒 𝑒𝗑𝑒𝑟𝑐i𝑠𝑒

[(50 000* 4)+(10 000 * 3.75)]
=[ ]
(50 000+10 000)


= 3. 958333
FOR ACCADEMIC NEEDS CONTACT /0651609781

, 1
Number of rights share issue = (50 000 * 5)
= 10 000 𝑠ℎ𝑎𝑟𝑒𝑠

Adjustment factor = 4
3.958333

= 1. 010526

(50 000 * 1.010526) = 50 526. 3

Bonus element= (50 526.3 − 50 000)
= 526. 3

Conclusion
The company`s performance has deteriorated as the earnings per share decreased
from R0.15 or 15c per share to R0.11 or 11c per share.

(b) Diluted earnings per share

Convertible debentures
6
Interest savings = (25 000 * 10% * * 72%)
12
= 𝑅900
6
Increase in ordinary shares = (2 000 * 5 * )
12
= 5 000 𝑠ℎ𝑎𝑟𝑒𝑠

Share Options
4.15 − 3.8
Shares at fair value = [5 000 * ]
4.15
= 422 𝑠ℎ𝑎𝑟𝑒𝑠
5
Bonus element = (422 * )
12
= 174 𝑠ℎ𝑎𝑟𝑒𝑠

Test of Dilution Sequence

Increase in Increase in Earnings per Order of
earnings number of incremental dilution
ordinary share
shares
Convertible debentures 900 5 000 0.18 2
Share options 0 422 0 1
FOR ACCADEMIC NEEDS CONTACT /0651609781