Earnings Per Share
PART 1
A company has the following shares in issue throughout 2020:
12 000 ordinary shares, and 13 000 non-redeemable, 9% discretionary, participating preference shares (at R2 each).
The company earns a profit after tax of R125000. ·
The preference shares participate to the extent of 1:4 of the dividends declared to ordinary shareholders.
The total ordinary dividend declared for 2020 was R6 000.
The company declared the full 2020 dividends owing to the preference shareholders.
Required:
Calculate the following:
1.1 Earnings per ordinary share
1.2 Earnings per participating preference share
1.1 Earnings per ordinary share:
First, we need to calculate the total dividends declared for ordinary shareholders. Since the preference shares participate in the dividends to the extent of 1:4, the preference shareholders will receive 1/5th of the total dividends declared.
Total dividends declared = R6,000
Total dividends allocated to preference shares = R6,000 * (1/5) = R1,200
Next, we need to calculate the earnings available for ordinary shareholders. This is the profit after tax minus the dividends allocated to preference shares.
Earnings available for ordinary shareholders = R125,000 - R1,200 = R123,800
Finally, we divide the earnings available for ordinary shareholders by the number of ordinary shares in issue to get the earnings per ordinary share.
Earnings per ordinary share = R123,800 / 12,000 = R10.32 per ordinary share
1.2 Earnings per participating preference share:
The participating preference shares receive a fixed dividend rate of 9% of their nominal value, which is R2 each. This means that each preference share receives an annual dividend of R2 * 9% = R0.18.
Since the preference shares participate to the extent of 1:4 of the dividends declared to ordinary shareholders, each preference share receives 1/4th of the earnings per ordinary share.
Earnings per participating preference share = 1/4 * Earnings per ordinary share = 1/4 * R10.32 = R2.58 per participating preference share