Hazel is a quoted company which operates in the IT industry. In the year ended 30 June

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Question:

Hazel is a quoted company which operates in the IT industry. In the year ended 30 June 2019, Hazel reported a profit after tax of £2,320,000.

On 1 July 2018 Hazel had 4 million £0.50 shares in issue. On 1 September 2018 Hazel issued 1 million shares at full market price of £1.20 per share. On 1 February 2019 the company made a 2:5 rights issue for £1.30 per share, which was fully subscribed. The market price of Hazel’s shares immediately before the rights issue was £1.50 per share.

On 1 July 2018 Hazel issued £2,600,000 5% convertible bonds. The bonds will mature on 30 June 2023 at which date each £100 bond can be converted into 120 £0.50 equity shares.

Hazel’s basic earnings per share (EPS) for the year ended 30 June 2018 was 42p per share.

Hazel pays tax at 20%.

Required:

(a) Calculate Hazel’s basic EPS for the year ended 30 June 2019, and the restated comparative basic EPS for the year ended 30 June 2018 in accordance with IAS 33 Earnings Per Share. (Round to the nearest whole number where applicable.)

(b) “EPS is thought to have a significant impact on the market share price. However, there are limitations to its use as a performance measure.”

With reference to the appropriate literature, critically assess the limitations of an IAS 33-calculated EPS as an inter-period and inter-company performance measure.

(c) Briefly comment on the need to disclose a diluted EPS figure and on the relevance of this figure to the shareholders.

(d) Calculate the diluted EPS for the year ended 30 June 2019 (comparatives are not required).