Reference no: EM133112107

Question - G Ltd was incorporated in 20x1 with share capital of 10,000,000 ordinary shares of $1 each.

In February 20x2, G Ltd issued 1,000,000 cumulative convertible "A" preference shares at $10 each. The cumulative preference shares pay net dividends of 5% per year and are convertible into ordinary shares during the year 20x5 at the rate of 8 ordinary shares for 1 preference share.

In February 20x2, G Ltd also issued options to the public to buy 5,000,000 of the company's ordinary shares at an exercise price of $1.60 per share, exercisable from January 20x5.

In March 20x3, G Ltd issued 1,000,000 convertible "B" preference shares at $5 each. The preference shares pay net dividends (non-cumulative) of 4% per year and are convertible into ordinary shares during the year 20x6 at the rate of 5 ordinary shares for 1 preference share.

In 20x4, G Ltd paid dividends of 5% and 4% to its "A" and "B" preference shareholders, respectively. G Ltd's profit after tax was $1,400,000 for the year ended 31 December 20x4. The average market price of G Ltd's ordinary shares in 20x4 was $2.50 per share.

Required -

(a) (i) Are G Ltd's share options dilutive or anti-dilutive? How do we compute diluted EPS for a company that has dilutive options?

(ii) Explain the double dilutive effect of employee stock options and how it is dealt with in the computation of diluted EPS.

(b) (i) Compute the basic EPS and diluted EPS for year ended 31 December 20x4.

(ii) How would your answer in part (b)(i) change if G Ltd did not pay any dividends to its "A" preference shareholders and "B" preference shareholders during 20x4?

(iii) When there are more than one dilutive potential ordinary shares (POS), why do we use the step-by-step basis and start with the most dilutive POS when computing diluted EPS?