XYZ company has current earnings of 3 per share with 5,00,000 shares outstanding. The company plans to issue 40,000, 7% convertible preference…

CA Final · Advanced Financial Management · RTP · September 2025
XYZ company has current earnings of 3 per share with 5,00,000 shares outstanding. The company plans to issue 40,000, 7% convertible preference shares of 50 each at par. The preference shares are convertible into 2 shares for each preference shares held. The equity share has a current market price of 21 per share. (i) What is preference share's conversion value? (ii) What is conversion premium? (iii) Assuming that total earnings remain the same, calculate the effect of the issue on the basic earning per share (a) before conversion (b) after conversion. (iv) If profits after tax increases by 1 million what will be the basic EPS (a) before conversion and (b) on a fully diluted basis?

Suggested Answer and Working Notes:

3. (i) Conversion value of preference share Conversion Ratio x Market Price 2 × ₹ 21 = 42 (ii) Conversion Premium (50/42) – 1 = 19.05% (iii) Effect of the issue on basic EPS ₹ Before Conversion Total (after tax) earnings - 3 × 5,00,000 15,00,000 Dividend on Preference shares 1,40,000 Earnings available to equity holders 13,60,000 No. of shares 5,00,000 EPS 2.72 On Diluted Basis Earnings 15,00,000 No of shares (5,00,000 + 80,000) 5,80,000 EPS 2.59 (iv) EPS with increase in Profit ₹ Before Conversion Earnings 25,00,000 Dividend on Pref. shares 1,40,000 Earning for equity shareholders 23,60,000 No. of equity shares 5,00,000 EPS 4.72 On Diluted Basis Earnings 25,00,000 No. of shows 5,80,000 EPS 4.31

Topics: Security Valuation

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