Use two decimals for calculation.

SECTION A

First Cup Ltd., a Canadian coffee retailer and roaster which operates more than 1,000 cafes in Canada, reported the following balances as at December 31, 2019:

7% Par $100 convertible bonds, issued at par $ 250,000

3,000 call options, each entitled to purchase 1 common share

Cumulative Preferred shares, 36,000 convertible shares outstanding $ 960,000

Common shares, 112,500 shares issued and outstanding 2,880,000

Contributed surplus on repurchase of common shares 31,200

Retained earnings 1,032,000

First Cup Ltd. applies IFRS. The company also informed you details related to the following transactions during 2020:

a] On February 1, the company declared and distributed a 20% stock dividend for its common shareholders. The shares were being traded in the market at $30.

b] On March 1, it acquired 18,000 of its own common shares in the market at $30.00 per share and retired them on the same day.

c] On April 1, the company issued 17,500 common shares in exchange for plant and equipment assessed at $336,000.

d] On May 1, 40% of the call option holders exercised their options when the market price of the common share was $31. As these options were issued before stock dividends, options holders receive an increased number of shares considering a 20% stock dividends (i.e. adjust for stock dividend).

e] On May 15, the company declared a 3:1 stock split on common shares. The common shares were being traded at the adjusted market price of $32.00 per share

f] On August 1, the company issued share certificates for 3,708 common shares to subscribers who had applied to an earlier share subscription issue. These subscribers had paid for the shares they had subscribed at $34 per share.

g] On October 1, 20% of the bond holders submitted their bonds to the company for conversion into common shares. As the bonds were issued before stock dividends and stock split, the number of shares given to reward conversion need to be adjusted consequently.

h] No Dividends have been declared in the previous two years. Dividends for the current year were also not declared.

i] Assume that none of the convertible bonds nor the convertible preferred shares were converted during 2020. Similarly, none of the call options were exercised during the year. The strike (exercise) price for the call options, duly adjusted for dividends and splits, was $9 per share.

ii] Further assume that on January 1, 2020, the company had also issued 3,300 put options to its directors as compensation for their services during 2019. Each option enabled the holder to sell 1 common share to the company at a strike (exercise) price of $12 which is also similarly adjusted for dividends and splits. All options were still outstanding on December 31, 2020.

iii] Assume a 20% tax rate for 2020 and an average market price of $10 (which reflects adjustments for dividends and splits) for the companys common shares during 2020.

iv] Regardless of your computations in Section A above, assume that the weighted average number of shares for basic EPS is now 407,400 shares and calculate basic eps dependently to identify dilutive securities

Required:

To answer the following questions (question 10 to 23). You need to identify the potentially dilutive securities which could be included in the computation of diluted earnings per share and rank them from the most dilutive to the least dilutive.

You need also to calculate diluted earnings per share to be reported by the company in 2020 using the schedule given below (after question 23).

1. The basis eps equals

1. $3.35
2. 4.35
3. 5.
4. None of the above

To determine the dilutive effect of call options,

1. Cash inflow from options equals

1. $10,800
2. 27,000
3. 97,200
4. None of the above

1. You find that incremental shares equal

1. 9,720
2. 1,080
3. 0
4. None of the above

1. You find that incremental eps equal

1. $0
2. 0.22
3. 0.25
4. 0.33

To determine the dilutive effect of Put options,

1. Cash required for options

1. $142,560
2. 11,880
3. 118,800
4. None of the above

1. Number of shares to be issued (total)

1. 11,880
2. 14,256
3. 1,188
4. None of the above

1. The deficit of shares (incremental shares) equals

1. 2,500
2. 2,600
3. 2,376
4. None of the above

After Determining whether bonds are dilutive or not

1. The number of shares to be issued is

1. 72,000
2. 60,000
3. 24,000
4. 50,00

1. The incremental eps

1. $4.6
2. 0.5
3. 0.6
4. 0.19

1. Consequently, the bonds are antidilutive?

1. Yes
2. No

Determining whether convertible preferred shares are dilutive or not

1. The dividends avoided for the calculation of bonds dilutive effect equal

1. $75,600
2. 226,800
3. 302,400
4. None of the above

1. Shares to be issued

1. 36,000
2. 72,000
3. 259,200
4. None of the above

1. Incremental eps for preferred shares is

1. $0.2917
2. 0.2930
3. 0.3502
4. 0.5555

Diluted EPS calculation

1. When ranking the dilutive securities

1. Options was ranked first
2. Bonds are ranked first
3. Preferred shares are ranked first
4. None of these securities is dilutive

Use the template to calculate Diluted EPS:

	Income	Number of shares	EPS
Basic EPS
Put options
Call options
Bonds
Preferred shares
Diluted EPS