ACCA FR · Chapter 10 · Question 6 of 9
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.)
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 56.29 cents
Explanation
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.
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