This question tested earnings per share and P/E ratio. The widely held of the marks were for calculations and a key test was the distinction between what transactions affect basic eps and what affect diluted eps - something that candidates have fight with in previous diets.
Candidates should have known how to carry out these calculations and follow the standard layouts granted in the study materials. Identifying the correct profit figure was key and then time should have been taken to deemed which of the transactions/instruments would affect each of the calculations. The calculation of the P/E ratio should have been clear-cut as the relevant information was separated out in the question and marks were honoured based on candidates own figures from part (a).
(a) (i) Basic earnings per share for the year ended 30 September 2012
|
Profit after tax ($10,582,000 - $435,000)
|
$10,147,000
|
|
Weighted average number of shares:
|
|
At 1 October 2011
|
8,000,000
|
|
Bonus issue 1 for 4
|
2,000,000
|
|
Full market price issue (1,500,000 x 3/12)
|
375,000
|
|
10,375,000
|
|
Basic eps for 2012 $10,147,000/10,375,000
|
97.8 cents per share
|
|
Basic eps for 2011 restated 108.2 cents x bonus fraction of 4/5
|
86.6 cents per share
|
|
(ii) Fully diluted earnings per share for the year ended 30 September 2012 Reported profit after tax (as in part (a))
|
$10,147,000
|
|
Plus post-tax saving of finance costs (70% x 6% x $5,000,000)
|
$210,000
|
|
$10,357,000
|
|
Weighted average number of shares:
|
|
As reported in part (a)
|
10,375,000
|
|
Dilution from potential share issue
|
1,000,000
|
|
11,375,000
|
|
Fully diluted eps $10,357,000/11,375,000
|
91.1 cents per share
|
(b) (i) Calculation of P/E ratio of VB = Share price / eps = 958 cents/97.8cents = P/E of 9.8.
(ii) The P/E ratio of VB at 9.8 is below that of its opponent at 12.2. The P/E ratio is seen as an indication of the self-assurance of the market in an entity in terms of its future growth and profitability scenario. Consequently it would appear that the market has superior confidence in the growth prospects of the competitor compared to VB. This confidence could live because perhaps the opponent has been established for longer, with a more established track record for growth.
An alternative way to look at the P/E ratio is to deem the risk of each investment. In general, the lower the P/E ratio, the higher the apparent risk for the investor. This would indicate that VB is considered by the market as a riskier investment than the opponent, hence why there is greater confidence in the competitor.
However, there are other reasons why the P/E ratios are dissimilar. For example, it's possible that the share price for VB has been temporarily depressed, maybe as the result of a profits warning or the loss of a main contract at the year end. On the contrary, the competitor's share price might be overstated in anticipation of a takeover.