QUESTION THREE (20 MARKS)
Madihlaba Ltd had the following capital structure at 30 June 2014, its prior reporting date: Share type Number of shares
Class A shares (issued at R1 each) 1 000 000
Class B shares (10% cumulative dividend) issued at 50c each 400 000
During the period ending 30 June 2015, the entity issued 300,000 new Class A shares to the existing shareholders as capitalization shares on 1 January 2015, and issued a further 200,000 Class A shares at their fair value of R2 each on 1 April 2015.
The following extract was obtained from the statement of changes in shareholders’ equity: 30/6/2015 30/6/2014
R'000 R'000
Retained income opening balance 3 080 2 000
Profit/(Loss) for the period 1 700 1 400
Less: Class B dividends (20) (20)
Less: Class A dividends (450) (300)
Retained income closing balance 4 310 3 080
REQUIRED:
3.1 Calculate basic earnings OR earnings attributable to ordinary shareholders for 2015. (6)
3.2 Calculate the Weighted Average Number of Ordinary Shares (WANOS). (8)
3.3 Hence calculate the Basic Earnings per share (EPS) for Class A shares. (6
3.1 Calculate basic earnings OR earnings attributable to ordinary shareholders for 2015.
To calculate the basic earnings or earnings attributable to ordinary shareholders for 2015, we need to subtract the dividends paid to Class A and Class B shareholders from the profit for the period.
Profit for the period = 1,700
Less: Class B dividends = (20)
Less: Class A dividends = (450)
Basic Earnings or Earnings attributable to ordinary shareholders = profit for the period - Class B dividends - Class A dividends
= 1,700 - 20 - 450
= 1,230
Therefore, the basic earnings or earnings attributable to ordinary shareholders for 2015 is R1,230.
3.2 Calculate the Weighted Average Number of Ordinary Shares (WANOS).
To calculate the Weighted Average Number of Ordinary Shares (WANOS), we need to consider the number of shares outstanding during the period and the time-weighted average of those shares.
Number of Class A shares on 30/6/2014 = 1,000,000
Number of Class A shares issued on 1/1/2015 = 300,000
Number of Class A shares issued on 1/4/2015 = 200,000
Weighted Average Number of Ordinary Shares (WANOS) = [(Number of Class A shares on 30/6/2014 x time) + (Number of Class A shares issued on 1/1/2015 x time) + (Number of Class A shares issued on 1/4/2015 x time)] / total time
Total time = 30/6/2014 to 30/6/2015 = 1 year
Weighted Average Number of Ordinary Shares (WANOS) = [(1,000,000 x 1) + (300,000 x 0.5) + (200,000 x 0.25)] / 1
= (1,000,000 + 150,000 + 50,000) / 1
= 1,200,000
Therefore, the Weighted Average Number of Ordinary Shares (WANOS) is 1,200,000.
3.3 Hence calculate the Basic Earnings per share (EPS) for Class A shares.
Basic Earnings per share (EPS) = Basic Earnings / Weighted Average Number of Ordinary Shares (WANOS)
= 1,230 / 1,200,000
= 0.001025
Therefore, the Basic Earnings per share (EPS) for Class A shares is 0.001025.
3.1 To calculate basic earnings or earnings attributable to ordinary shareholders for 2015, we need to subtract the dividends paid on Class B shares and Class A shares from the profit for the period:
Earnings attributable to ordinary shareholders = Profit for the period - Class B dividends - Class A dividends
= 1,700 - 20 - 450
= 1,230
Therefore, the basic earnings or earnings attributable to ordinary shareholders for 2015 is R1,230,000.
3.2 To calculate the Weighted Average Number of Ordinary Shares (WANOS), we need to determine the weighted average number of Class A shares during the period.
First, we need to find the number of Class A shares at the beginning of the period:
Number of Class A shares at the beginning of the period = Number of Class A shares at 30/06/2014 + Capitalization shares
= 1,000,000 + 300,000
= 1,300,000
Next, we calculate the weighted average number of Class A shares by taking into account the shares issued on 1 January 2015 and 1 April 2015:
Weighted average number of Class A shares = (Number of Class A shares at the beginning of the period * Number of months) + (Number of shares issued * Number of months)
= (1,300,000 * 6) + (300,000 * 5) + (200,000 * 3)
= 7,800,000 + 1,500,000 + 600,000
= 9,900,000
Therefore, the Weighted Average Number of Ordinary Shares (WANOS) is 9,900,000.
3.3 To calculate the Basic Earnings per share (EPS) for Class A shares, we divide the earnings attributable to ordinary shareholders by the Weighted Average Number of Ordinary Shares (WANOS):
Basic EPS for Class A shares = Earnings attributable to ordinary shareholders / WANOS
= 1,230,000 / 9,900,000
= 0.124
Therefore, the Basic Earnings per share (EPS) for Class A shares is 0.124.