A firm shares currently traded at $69 on a reported P/E of 23. There are currently 20m shares in issue. On reviewing the account, an analyst notes that there was one-off expense of $10,000,000 and that there are currently dilutive instruments that would result in a net increase of 5m new shares. Using the above adjustment a better EPS would be: a. 1.875 b. 2.5 c. 2.625 d. 3.5 ?
P/PE= 69/23 = EPS = 3 NI available to Common Equity = 20m shares*3= $60m I believe that since it is a one off expense, we should add it back to NI and also add the five million shares from the dilutive securities: $70m/25m shares= 2.8 EPS Where am I going wrong. If i was in the exam right now I’d choose C
If you assume a tax rate of 40% then Ni = $66M EPS = $66/25 = $2.64 which is C. There should’ve been some tax info.
My thought is the question is asking what is a better basic EPS, not diluted EPS. 69/23 = 3 3* 20m = $60m $60m - $10m = $50m $50m / 20m shares = 2.5 B - Basic EPS I could be completely off and Dreary could be right but the question was vague.
I initially calculated 2.8 but this is incorrect (according to the answer). The answer was explained as follow: EPS: 3. The extra 10m is added back to NI thus will push EPS to $3.5. Now dilute the 5m shares, that means reducing the EPS by 25%. EPS -> 2.625. I have no idea how this logic works. Shouldn’t be any tax assumption here.
According to their math: NI = $60m + $10m = $70m / 20m = $3.5 per share $70m -(70*.25) = $52.5m $52.5m / 20m = $2.625 per share