ACCA FR · Chapter 10
Earnings per share MCQs with Answers
9 multiple-choice questions on Earnings per share for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Wigeon Co's profit after tax for the year was $2,400,000. It paid ordinary dividends of $500,000 and dividends of $200,000 on irredeemable preference shares, which are classified as equity. There were 5 million ordinary shares in issue throughout the year. What is basic earnings per share?
- A) 44 cents
- B) 48 cents
- C) 34 cents
- D) 38 cents
Show answer & explanation
Answer: A) 44 cents
Basic EPS = profit attributable to ordinary equity holders / weighted average number of ordinary shares. Dividends on irredeemable preference shares classified as equity are deducted, but ordinary dividends are not. Earnings = $2,400,000 - $200,000 = $2,200,000. EPS = $2,200,000 / 5m = 44 cents.
Question 2
At 1 January Gadwall Co had 4 million ordinary shares in issue. On 1 April it issued a further 1.2 million shares at full market price. Earnings for the year to 31 December were $3,430,000. What is basic EPS?
- A) 66 cents
- B) 85.75 cents
- C) 80 cents
- D) 70 cents
Show answer & explanation
Answer: D) 70 cents
A full-price issue is time-weighted from the date of issue. Weighted average shares = 4m + (1.2m x 9/12) = 4.9m. EPS = $3,430,000 / 4.9m = 70 cents.
Question 3
Garganey Co had 8 million shares in issue until 1 July 20X6, when it made a 1 for 4 bonus issue. Earnings for 20X6 were $5,000,000. Basic EPS reported for 20X5 was 55 cents. What are basic EPS for 20X6 and the restated EPS for 20X5?
- A) 20X6: 55.56 cents; 20X5 restated: 55 cents
- B) 20X6: 50 cents; 20X5 restated: 55 cents
- C) 20X6: 50 cents; 20X5 restated: 44 cents
- D) 20X6: 62.5 cents; 20X5 restated: 68.75 cents
Show answer & explanation
Answer: C) 20X6: 50 cents; 20X5 restated: 44 cents
A bonus issue brings in no resources, so the new shares are treated as if they had always been in issue. Shares = 8m x 5/4 = 10m, and 20X6 EPS = $5,000,000 / 10m = 50 cents. The comparative is restated by multiplying by the inverse of the bonus fraction: 55c x 4/5 = 44 cents.
Question 4
At 1 January Shoveler Co had 6 million shares in issue. On 1 October it made a 1 for 5 rights issue at $2.00 per share. The market price just before the issue (cum rights) was $3.20. Earnings for the year ended 31 December were $9,900,000. What is basic EPS?
- A) 137.50 cents
- B) 150 cents
- C) 157.14 cents
- D) 128.91 cents
Show answer & explanation
Answer: B) 150 cents
TERP = (5 x $3.20 + 1 x $2.00) / 6 = $3.00. Bonus fraction = $3.20/$3.00. Weighted average = 6m x 3.2/3.00 x 9/12 + 7.2m x 3/12 = 4.8m + 1.8m = 6.6m. EPS = $9,900,000 / 6.6m = 150 cents.
Question 5
Pintail Co makes a 1 for 4 rights issue at $1.50 per share. The market price per share immediately before the issue is $2.50. What is the theoretical ex-rights price?
- A) $2.00
- B) $2.88
- C) $2.30
- D) $2.12
Show answer & explanation
Answer: C) $2.30
TERP = (market value of existing shares + cash raised) / total shares after the issue = (4 x $2.50 + 1 x $1.50) / 5 = $11.50 / 5 = $2.30.
Question 6
Mallard Co's earnings for the year are $6,000,000, and it has 10 million ordinary shares in issue. It also has $4,000,000 of 6% convertible loan notes in issue all year, convertible at 25 shares per $100 of loan notes. The tax rate is 20%. What is diluted EPS? (Round to two decimal places.)
- A) 56.73 cents
- B) 54.55 cents
- C) 56.29 cents
- D) 60.00 cents
Show answer & explanation
Answer: C) 56.29 cents
On conversion, $4,000,000/100 x 25 = 1m extra shares would be issued, and interest saved after tax = $4,000,000 x 6% x (1 - 20%) = $192,000. Diluted EPS = ($6,000,000 + $192,000) / (10m + 1m) = $6,192,000 / 11m = 56.29 cents. Basic EPS is 60 cents, so the notes are dilutive.
Question 7
Mallard Co (earnings $6,000,000, 10 million shares in issue) also has 2 million share options outstanding, exercisable at $4.00. The average market price of its shares during the year was $5.00. Considering only the options, what is diluted EPS? (Round to two decimal places.)
- A) 50.00 cents
- B) 57.69 cents
- C) 51.72 cents
- D) 60.00 cents
Show answer & explanation
Answer: B) 57.69 cents
Options are treated as if the shares were issued partly at market price (no dilution) and partly free of charge. Cash on exercise = 2m x $4.00 = $8,000,000, which would buy 1.6m shares at $5.00. Free shares = 2m - 1.6m = 0.4m. Diluted EPS = $6,000,000 / 10.4m = 57.69 cents.
Question 8
What is the main purpose of disclosing diluted earnings per share?
- A) To show what EPS would have been if the company had made no bonus issues
- B) To give a forecast of next year's EPS
- C) To show earnings per share after deducting all dividends paid
- D) To warn shareholders of the possible fall in EPS if potential ordinary shares, such as convertibles and options, become actual shares
Show answer & explanation
Answer: D) To warn shareholders of the possible fall in EPS if potential ordinary shares, such as convertibles and options, become actual shares
Diluted EPS adjusts basic EPS for the effect of potential ordinary shares outstanding, such as convertible instruments, options and warrants. It warns current shareholders how far their share of earnings could fall if those instruments were converted or exercised. It is not a forecast.
Question 9
In calculating basic EPS, which of the following is deducted from profit for the year (attributable to the parent) to arrive at earnings?
- A) Equity dividends paid to ordinary shareholders
- B) The transfer of excess depreciation from the revaluation surplus to retained earnings
- C) Gains on revaluation of property recognised in other comprehensive income
- D) Dividends on irredeemable preference shares that are classified as equity
Show answer & explanation
Answer: D) Dividends on irredeemable preference shares that are classified as equity
Basic earnings are profit attributable to ordinary equity holders. Preference dividends on shares classified as equity are deducted, because they are not part of profit already. Dividends on redeemable preference shares are already in finance costs. Ordinary dividends are an appropriation to ordinary shareholders and are not deducted. Reserve transfers and OCI items do not affect earnings.