Question

Describe how preference dividends affect the calculation of EPS. (4 marks)

Preference dividends must be subtracted from the company’s net income before
compute EPS since preferred shareholders must be paid full before common
stockholders can receive any dividends. (answer not sure)

Question 1
Syarikat Sihat Berhad had 100,000 units of ordinary shares and 30,000 units of 7%
cumulative preference shares with RM100 par values outstanding at the end of 31
December 2013. On 28 February 2014, the company purchased 24,000 units of
ordinary shares on the open market as treasury shares by paying RM45 per unit share.
Later, the company sold 6,000 unit of the treasury shares for RM47 per unit share on
30 September 2014.
Net income for Syarikat Sihat Berhad for the year 2014 was RM540,000. The income
tax rate for the year 2014 is 20%.
In addition, Syarikat Sihat Berhad also reported fully vested incentive share options
outstanding at the end of 31 December 2013, that giving the employees the option to
buy 50,000 units of ordinary shares at the price of RM40 per unit share. The market
price of the ordinary shares averaged RM50 per unit share during the year 2014.
5,000 units of 6% bonds were issued at par on 1 January 2014. Each RM1,000 bond is
convertible into 125 units of ordinary shares. None of the bonds had been converted
by 31 December 2014 and no share options were exercised during the year.
(**although question stated just assumed bonds have been exercised and share
options have been converted)
Calculate the Basic EPS and Diluted EPS for Syarikat Sihat Berhad.
Basic EPS
= RM540,000 – (7% x RM100 x 30,000)
100,000 – (24,000 x 10/12) + (6,000 x 3/12)
= 330,000
81,500
= RM4.05
** Net income – Preference shares dividend (if company has preference shares)
** Treasury shares need to multiply time proportion
Diluted EPS
= RM540,000 – (7% x RM100 x 30,000) + (5,000 x RM1,000 x 6% x 80%)
100,000 – (24,000 x 10/12) + (6,000 x 3/12) + (50,000 - 40,000*) + (5,000 x 125)
= 570,000
716,500
= RM 0.80

Earnings
Bonds = 5,000 x RM1,000 x 6%
= RM 300,000
Deduct tax effect = 300,000 x (1-20%)
= RM 240,000
No. of shares
Bonds (each RM1,000 convert to 125 shares)
= 5,000 x 125
= 625,000 shares
Share options
** need to adjust no of shares for share option
** shares at market value = original no of shares x (option price/ market price)
Formula = shares under the option – shares at market value
= original no of shares–[original no of shares x(option price/market
price)]
50,000 x (RM40/RM50) = 40,000 shares
50,000 – 40,000 = 30,000 shares
Question 2
ABC berhad reported net income of RM154 million in 2021 (tax rate 20%). Its capital
structure included:
1 Jan 60 million ordinary shares were outstanding
1 March 12 million new shares were issued
17 June A 10% bonus issue was distributed (amounts in millions, except per
share amount)
1 Sep 12 million new shares were issued
Calculate the basic earnings per share for the year 2021.
RM154
60(110%) + 12 (10/12) (110%) + 12 (4/12)
= RM154/ 81
=RM 1.90
**bonus issue needs to add into no. of share that is in prior period from the issuance,
no. of share after the issuance is not affected

Question 3
ABC berhad reported net income of RM154 million in 2021 (tax rate 20%). Its capital
structure included:
1 Jan 60 million ordinary shares were outstanding
1 March 12 million new shares were issued
17 June A 10% bonus issue was distributed (amounts in millions, except per
share amount)
1 Oct 8 million shares were reacquired as treasury shares
The average market price of the ordinary shares during 2021 was RM25 per share
Preference Shares, Convertible into 3 million ordinary shares
1 Jan – 31 Dec 5 million 8%, RM10 par shares
Incentive Share Options
Executive share options granted in 2016, exercisable after 2020 for 15 million
ordinary shares at an exercise price of RM20 per share.
Calculate the basic earnings per share for the year 2021.
Earnings
Preference dividends
= 5 million x 8% x RM10
=RM4 million
RM154 – RM 4 = RM150 million

Basic EPS
= RM150
60 (110%) + 12 (10/12) (110%)– 8(3/12)
= 150/75
= RM 2 per share

Calculate the diluted earnings per share for the year 2021.
Earnings = RM154
*Preference dividends don’t need minus because it already convert into ordinary
shares
No of shares
Share options
15 million x (RM20/RM25) = 12 million shares
15 – 12 = 3 million
Conversion of preference shares into 3 million ordinary shares

Diluted EPS
= RM154
60 (110%) + 12 (10/12) – 8(3/12) + (15-12) + 3
= 154/81
= RM1.90 per share
ABC berhad reported net income of RM154 million in 2021 (tax rate 20%). Its capital
structure included:
1 Jan 60 million ordinary shares were outstanding
1 March 12 million new shares were issued
1 Aug A 1 for 4 bonus issue
1 Sep 12 million new shares were issued
Calculate the basic earnings per share for the year 2021.

ABC berhad reported net income of RM154 million in 2021 (tax rate 20%). Its capital
structure included:
1 Jan 60 million ordinary shares were outstanding
1 March 12 million new shares were issued
1 Aug A 1 for 5 right issue held at RM1.50. The price of share immediately
before the right issue was RM1.40.
1 Sep 12 million new shares were issued
Calculate the basic earnings per share for the year 2021.