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CA Intermediate · Advanced Accounting · AS 20 Earnings Per Share

Himalaya Pharma Ltd has net profit of ₹30,00,000 for the year and 10,00,000 weighted average equity shares. At the beginning of the year it issued ₹20,00,000 of 10% convertible debentures, convertible into 2,00,000 equity shares. It also has 1,00,000 share options with an exercise price of ₹40, while the average fair value per equity share for the year was ₹50. The tax rate is 30%. What is the diluted EPS as per AS 20?

Diluted EPS is ₹2.57. The options add 20,000 shares for no consideration, and the debentures add 2,00,000 shares with after-tax interest of ₹1,40,000. Both are dilutive, so earnings are ₹31,40,000 and shares are 12,20,000, giving ₹2.57.

  1. A₹2.57Correct
  2. B₹2.62
  3. C₹2.42
  4. D₹2.94

Explanation

Basic EPS = ₹3.00. Options: shares issued for no consideration = 1,00,000 − (1,00,000 × 40/50) = 20,000, with no earnings effect, so they are the most dilutive. EPS becomes 30,00,000 / 10,20,000 = ₹2.94. Debentures: after-tax interest = 2,00,000 × 70% = 1,40,000, or ₹0.70 per incremental share, which is below ₹2.94, so they are dilutive. Diluted EPS = 31,40,000 / 12,20,000 = ₹2.57. ₹2.62 ignores the tax saving on interest.

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