2.2 The profit after tax for Zola (Pty) Ltd for the year ended 30 September 2009 was R15 million. At 1 October 2008 the company had in issue 36 million equity shares and a R10 million 8% convertible loan note. The loan note will mature in 2010 and will be redeemed at par or converted to equity shares on the basis of 25 shares for each R100 of loan note at the loan-note holders’ option. On 1 January 2009 Zola (Pty) Ltd made a fully subscribed rights issue of one new share for every four shares held at a price of R2,80 each. The market price of the equity shares of Zola (Pty) Ltd immediately before the issue was R3,80. The earnings per share (EPS) reported for the year ended 30 September 2008 was 35 cents. Zola (Pty) Ltd’s income tax rate is 25%.
REQUIRED:
Calculate the (basic) EPS figure for Zola (Pty) Ltd (including comparatives) and the diluted EPS (comparatives not required) that would be disclosed for the year ended 30 September 2009. (SHOW ALL WORKINGS) (14 Marks)
To calculate the basic EPS for Zola (Pty) Ltd for the year ended 30 September 2009, we need to consider the number of equity shares outstanding.
1. Calculate the number of equity shares after the rights issue:
Number of equity shares before rights issue = 36 million
Number of new shares issued = 36 million / 4 = 9 million
Number of equity shares after rights issue = 36 million + 9 million = 45 million
2. Calculate the weighted average number of equity shares:
Number of equity shares from 1 October 2008 to 31 December 2008 = 36 million
Number of equity shares from 1 January 2009 to 30 September 2009 = 45 million
Weighted average number of equity shares = (36 million x 9/12) + (45 million x 3/12) = 81 million
3. Calculate the earnings available to ordinary shareholders:
Profit after tax = R15 million
Earnings available to ordinary shareholders = Profit after tax * (1 - Income tax rate) = R15 million * (1 - 0.25) = R11.25 million
4. Calculate the basic EPS:
Basic EPS = Earnings available to ordinary shareholders / Weighted average number of equity shares = R11.25 million / 81 million = 0.1389 or 13.89 cents per share
To calculate the diluted EPS, we need to consider the convertible loan note.
5. Calculate the number of potential equity shares from the convertible loan note:
Convertible loan note amount = R10 million
Conversion rate = 25 shares for each R100 of loan note
Number of potential equity shares = Convertible loan note amount / R100 * Conversion rate = R10 million / R100 * 25 = 25 million
6. Calculate the diluted weighted average number of equity shares:
Diluted weighted average number of equity shares = Weighted average number of equity shares + Number of potential equity shares = 81 million + 25 million = 106 million
7. Calculate the diluted EPS:
Diluted EPS = Earnings available to ordinary shareholders / Diluted weighted average number of equity shares = R11.25 million / 106 million = 0.1061 or 10.61 cents per share