(a) The following figures have been calculated from the financial statements (including co

Question

(a) The following figures have been calculated from the financial statements (including comparatives) of Barstead for

the year ended 30 September 2009:

increase in profit after taxation 80%

increase in (basic) earnings per share 5%

increase in diluted earnings per share 2%

Required:

Explain why the three measures of earnings (profit) growth for the same company over the same period can

give apparently differing impressions. (4 marks)

(b) The profit after tax for Barstead for the year ended 30 September 2009 was $15 million. At 1 October 2008 the company had in issue 36 million equity shares and a $10 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 $100 of loan note at the loan-note holders’ option. On 1 January 2009 Barstead made a fully subscribed rights issue of one new share for every four shares held at a price of $2·80 each. The market price of the equity shares of Barstead immediately before the issue was $3·80. The earnings per share (EPS) reported for the year ended 30 September 2008 was 35 cents.

Barstead’s income tax rate is 25%.

Required:

Calculate the (basic) EPS figure for Barstead (including comparatives) and the diluted EPS (comparatives not required) that would be disclosed for the year ended 30 September 2009. (6 marks)

Answer 1

正确答案：
(a)Whilstprofitaftertax(anditsgrowth)isausefulmeasure,itmaynotgiveafairrepresentationofthetrueunderlyingearningsperformance.Inthisexample,userscouldinterpretthelargeannualincreaseinprofitaftertaxof80%asbeingindicativeofanunderlyingimprovementinprofitability(ratherthanwhatitreallyis:anincreaseinabsoluteprofit).Itispossible,evenprobable,that(someof)theprofitgrowthhasbeenachievedthroughtheacquisitionofothercompanies(acquisitivegrowth).Wherecompaniesareacquiredfromtheproceedsofanewissueofshares,orwheretheyhavebeenacquiredthroughshareexchanges,thiswillresultinagreaternumberofequitysharesoftheacquiringcompanybeinginissue.ThisiswhatappearstohavehappenedinthecaseofBarsteadastheimprovementindicatedbyitsearningspershare(EPS)isonly5%perannum.ThisexplainswhytheEPS(andthetrendofEPS)isconsideredamorereliableindicatorofperformancebecausetheadditionalprofitswhichcouldbeexpectedfromthegreaterresources(proceedsfromthesharesissued)ismatchedwiththeincreaseinthenumberofshares.Simplylookingatthegrowthinacompany’sprofitaftertaxdoesnottakeintoaccountanyincreasesintheresourcesusedtoearnthem.Anyincreaseingrowthfinancedbyborrowings(debt)wouldnothavethesameimpactonprofit(asbeingfinancedbyequityshares)becausethefinancecostsofthedebtwouldacttoreduceprofit.ThecalculationofadilutedEPStakesintoaccountanypotentialequitysharesinissue.Potentialordinarysharesarisefromfinancialinstruments(e.g.convertibleloannotesandoptions)thatmayentitletheirholderstoequitysharesinthefuture.ThedilutedEPSisusefulasitalertsexistingshareholderstothefactthatfutureEPSmaybereducedasaresultofsharecapitalchanges;inasenseitisawarningsign.InthiscasethelowerincreaseinthedilutedEPSisevidencethatthe(higher)increaseinthebasicEPShas,inpart,beenachievedthroughtheincreaseduseofdilutingfinancialinstruments.Thefinancecostoftheseinstrumentsislessthantheearningstheirproceedshavegeneratedleadingtoanincreaseincurrentprofits(andbasicEPS);however,inthefuturetheywillcausemoresharestobeissued.ThiscausesadilutionwherethefinancecostperpotentialnewshareislessthanthebasicEPS.