Topic list Syllabus reference

Solution
Calculation of theoretical ex-rights value:
$

Presentation of published financial statements 1
11AS1 Presentation of Financial Statements 2
11AS 8 Accounting Policies, Changes in Accounting Estimates and Errors 302
11AS 33 Earnings per Share 322

$9
Theoretical ex-rights value = — = $1.50
6
Vy
EPS for 20X1
EPS as calculated before taking into account the rights issue = 40c ($40,000 divided by 100,000 shares).
1 50
EPS = —— x $0.4 = $0,375
1.60
(Remember: This is the corresponding value for 20X1 which will be shown in the financial statements for Brains Co at the end of 20X2.)
EPS for 20X2
Number of shares before the rights issue was 100,000. 20,000 shares were issued.
Stage 1: 100,000 x ⁹/₁₂ x L22 ₈₀ 000
1.50
Stage 2: 120,000 x³/₁₂ 30,000
110,000
$50,000
EPS = * ’ = $0.45
110,000
The figure for total earnings is the actual earnings for the year.


Rights issue
Question
Marcoli Co has produced the following net profit figures for the years ending 31 December.
$m
20X6 1.1


1.5
1.8
20X7
20X8
On 1 January 20X7 the number of shares outstanding was 500,000. During 20X7 the company announced a rights issue with the following details.

Rights:	1 new share for each 5 outstanding (100,000 new shares in total)
Exercise price:	$5.00
Last date to exercise rights:	1 March 20X7

The market (fair) value of one share in Marcoli immediately prior to exercise on 1 March 20X7 = $11.00.

Required
Calculate the EPS for 20X6, 20X7 and 20X8.
Answer
Computation of theoretical ex-rights value
This computation uses the total fair value and number of shares.
Fair value of all outstanding shares + total received from exercise of rights
No shares outstanding prior to exercise + no shares issued in exercise
($11.00 x 500,000) + ($5.00 x 100,000)
500,000 + 100,000

Computation of EPS

20X6
$

20X7
$

20X8
$

20X6 EPS as originally reported

2.20
2.00
2.54
3.00
$1,100,000
500,000

20X6
20X7
20X8
EPS restated for rights issue $1,100,000 10 . 10,
500,000 11 ^v 1Г
EPS including effects of rights issue $1,500,000
(500,000x2/12x11/10) + (600,000 x 10 /12)