Question $5$

a$)$ Define the P$/$E ratio and explain its importance to those interested in company financial

analysis. Include in your answer an explanation of what the ratio can indicate to investors

and also how the P$/$E ratio is related to the concept of EPS.

$(3$ marks$)$

b$)$ Mills plc had post$-$tax profits for $2017$ of $10,000,000$ and an issued share capital of

$12,000,000$ comprising $8,000,000$ ordinary shares of $50$p each and $8,000,000110\%$

preference shares. $($Financial year$-$end is $31$st December.$)$

Required:

Calculate the basic EPS for the year ended $31$st December $2017.$

$(3$ marks$)$

c$)$ Using the same basic information as given in part b$),$ now assume that Mills plc had split the

$8,000,000$ shares of $50$p each into $16,000,000$ shares of $25$p each $($i$.$e$.$ a $2-$for$-1$ split$)$ at $30$

June $2017.$

Required:

Calculate the basic EPS for the year ended $31$st December $2017.$

$(4$ marks$)$

d$)$ Zhang Ltd determines its profit attributable to ordinary shareholders for the reporting

period ended $30$ June $2017$ as $96,000.$ The company has calculated its weighted average

number of ordinary shares on issue during the period as $480,000.$ The weighted average

number of shares under share options during the period is $24,000.$ The average market price

of the entity$$s shares during the period is $2\mathrm{.}40$ per share, and the exercise price of shares

under option is $1\mathrm{.}50.$

$5$ Please turn over

Required:

i$.$ Give the definition of $$diluted EPS$$ in IAS $33$ and explain the terms $$dilutive$,$

$$antidilutive$,$ and $$potential ordinary shares$.$

$(4$ marks$)$

ii$.$ Calculate the basic EPS and diluted EPS for Zhang Ltd for the year ended $30$ June

$2017.$

$(4$ marks$)$

e$)$ On $1$ January $2015,$ X plc$$s issued share capital consisted of $800,000$ ordinary shares. There

are no preference shares. On $1$ April $2017,$ the company issued $1$ million of $10\%$

convertible loan stock, convertible in $2022$ at the rate of two ordinary shares for every $10$

of loan stock. The company$$s profit after tax for the year to $31$ December $2017$ is $640,000.$

The company pays tax at $20\%.$

Required:

Calculate the basic EPS and diluted EPS for X plc for the year ended $30$ December $2017.$

$(7$ marks$)$