Question Two

You are reviewing three prospective investment opportunities and have been supplied with Income Statements for the Year ended 31st December 2020 for each:

Company A

000

Turnover 42,000

Cost of sales Gross profit Distribution costs Administrative expenses Operating profit

Finance costs Profit on ordinary activities before taxation

Taxation on ordinary profit Profit after tax

Company B

000

23,000 (14,500) 8,500 (1,200) (2,800) 4,500 (1,100)

3,400

(500) 2,900

up as follows:

Company B

12,000,000 shares 1,000,000 shares

Company C

000

12,000 (6,700) 5,300 (1,000) (900) 3,400 (720)

2,680

(430) 2,250

Company C

15,000,000 shares None

(27,000) 15,000 (2,800) (3,300) 8,900 (1,200)

7,700

(1,400) 6,300

In addition to the above you have established: Share capital as at 1st January 2020 is made

Company A

Ordinary share capital (all at 50p per share) 10,000,000 shares 10% Preference share capital (at 1 per share) None

• Company A had 3,000,000 3% convertible loan stock in issue which could be converted in 2027 on the basis of 1,000 shares for each 5,000 loan.

• The corporation tax rate is 19%. Required:

  a) Assuming there has not been any additional shares issued during the year, calculate the basic and diluted earnings per share in relation to the year ended 31st December 2020 for;

(i) Company A (4 marks) (ii) Company B (6 marks) Question two continued.../

Question two continued.../

Company C made a 1 for 4 rights issue on 1st February 2020 at a reduced price of 70 pence per share. The share price immediately before the rights issue is 100 pence per share.

Required:

2. b) Calculate basic earnings per share for the year ended 31st December 2020 for company C.

   (12 marks)

3. c) With examples, explain how the rights issue within Company C would impact on the basic earnings per share calculation for the year ended 31st December 2019.