Reference no: EM132824058

E Ltd was incorporated in 20x1 with share capital of 20,000,000 ordinary shares of $1 each. On 1 January 20x2, E Ltd issued 10,000,000 convertible bonds for cash of $10,400,000. The bonds have a principal amount of $10,000,000, pay interest of 5% per year for 8 years, and mature on 31 December 20x9. The bonds are convertible into ordinary shares from 1 January 20x2 onwards at the rate of two ordinary shares for each convertible bond.

• E Ltd accounts for its convertible bonds based on the requirements of SFRS(I) 1-32, Financial Instruments: Presentation (Refer to Paragraph 31 of SFRS(I) 1-32). The market interest rate of a bond with the same features as E Ltd's convertible bonds, except for the convertibility feature, is 7%. The present value of the 5% bonds discounted at 5% is $10,000,000. The present value of the 5% bonds discounted at 7% is $8,805,740.
• (Note: The interest expense of convertible bonds is based on the market interest rate applied to the fair value of a bond with the same features as the convertible bonds, except for the convertibility feature. The fair value of a bond is the present value of future cash flows pertaining to the bond, discounted at the market interest rate.)
• As at 31 December 20x2, none of the convertible bonds had been converted into ordinary shares. E Ltd's profit after tax was $10,000,000 for the year ended 31 December 20x2. Assume a tax rate of 20%.

Required:

Problem (a) (i) How do we assess whether convertible bonds are dilutive or anti-dilutive?

Problem (a) (ii) Assess whether E Ltd's convertible bonds are deemed dilutive or anti-dilutive for the computation of diluted EPS for the year ended 31 December 20x2.

Problem (b) (i) How do we compute diluted EPS for a company that has dilutive convertible bonds?

Problem (b) (ii) Compute the basic EPS and diluted EPS for E Ltd for the year ended 31 December 20x2. Present your answers in dollars and round off your answers to four decimal places.

Problem (c) How would your answer in part (b)(ii) change if the convertible bonds are convertible into ordinary shares only in future years and not during 20x2?