Cheong Co reported a net profit of $1,324,543 for the year ended December 31, 2020. The following
Question:
Cheong Co reported a net profit of $1,324,543 for the year ended December 31, 2020. The following transactions affect shareholders’ equity for Cheong Co in the year ended December 31, 2020.
1/1/2020 At the start of the year, Cheong Co has 5,000,000 ordinary shares in issue; 1.2 million shares are held in treasury; there are 1.3 million non-cumulative 5% preference shares with a nominal value per share of $1. These are eligible for conversion to ordinary shares in a 1:1 ratio in 2022. This ratio is not changed by any share-related events that occur during the year. The ordinary share price is $1.07 per share
1/2/2020 The company reissues 300,000 treasury shares at the current market price of $1.07 per share.
1/3/2020 Employees exercise 120,000 employee share options at a strike price of $0.07. The company reissues treasury shares to meet the exercise. The market price just before the exercise is $1.06 per share.(Hint: the impact on basic EPS is similar to a rights exercise)
1/4/2020 The company reverse splits its ordinary share capital, replacing every 5 original shares with 3 shares post-reverse-split. The market price just before the reverse split is $1.08.
1/5/2020 The company buys out the shareholding of the former CEO in a negotiated settlement. He sells back his 500,000 shares to the company at a price of $1.90 which is at a premium of 10 cents to the price of $1.80 just before the buyback. The company immediately cancels the repurchased shares.
1/6/2020 Convertible bonds with a face value of $100,000 are converted to 100,000 shares. The share price just before the conversion is $1.70. (Hint: this affects basic EPS, not diluted EPS)
1/12/2020 The company declares and pays a dividend of $0.01 per ordinary share after meeting any prior requirement. The dividend is paid either in cash or the same dollar amount in shares at the shareholders’ option. If paid in shares, the amount is calculated based on the ex-dividend price at this date of $1.69 per share. Holders of 165,000 shares opt to receive the dividend in the form of shares.
31/12/2020 At year-end, the company has the following potentially dilutive instruments in addition to the preference shares. They were all issued prior to the current year 2020.
* 5,000,000 employee stock options vesting on 1/1/2022 with a strike price of $0.30
* 1 warrant attached to each preference share giving the preference shareholder the right to buy an ordinary share at a price of $2
* Outstanding convertible bonds with a face value of $1,000,000 convertible to 90 ordinary shares per $100 face value. The straight-bond (liability) portion of the convertible bond had a balance on 1/1/20 of $1,007,312 excluding any interest payable. The effective interest rate is 11% annually compounded APR.
Required:
Compute the basic EPS and diluted EPS for the year ended 31/12/2020. For computing average share price in the year if needed, you can assume that the price stays constant in between the dates for which prices are mentioned in the question, and that the price drops to the theoretical ex-rights price for rights exercise (or similar events).
