How to approach it
- For each item, answer four boxes: basic numerator, basic denominator, diluted numerator, diluted denominator.
- Say 'no effect' explicitly where nothing changes, with the reason.
Key rules to apply
- Cumulative preference dividends for the period are deducted from earnings whether or not declared.
- A rights issue at full market price has no bonus element: just time-weight the new shares.
- Options: no effect on basic; diluted adds only the shares deemed issued for nothing.
- Bonus issues after the reporting date but before authorisation are applied retrospectively to all periods presented.
Answer layout
| Transaction | Basic numerator | Basic denominator | Diluted numerator | Diluted denominator |
|---|---|---|---|---|
| Preference shares | ||||
| Rights issue | ||||
| Options | ||||
| Bonus after year-end |
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Applying a bonus fraction to a rights issue made at market price (examiners' point).
- Putting options into basic EPS, or all option shares into diluted EPS.
- Ignoring a bonus issue because it came after the year-end.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q4 without copying it.
Original practice question
All four effects in numbers
Profit Rs 50m. Rs 100m of 12% cumulative preference shares (equity) issued at the start of the year; no dividend declared. 10m ordinary shares at the start; 2m more issued on 1 April at full market price. 1m options at Rs 80 (average price Rs 100) all year. A 1-for-10 bonus issue was made after the year-end, before the statements were approved.
Required: Calculate basic and diluted EPS.
Worked solution
| Working | Value |
|---|---|
| Earnings: 50 − 12 | Rs 38m |
| Shares: 10m + 2m × 9/12 = 11.5m; × 1.1 | 12.65m |
| Basic EPS | Rs 3.00 |
| Option free shares: 1m × 20 ÷ 100 × 1.1 | 0.22m |
| Diluted EPS: 38 ÷ 12.87 | Rs 2.95 |
Answer: Basic Rs 3.00; diluted Rs 2.95.