What are 'potential' ordinary shares? In your answer provide three examples to support your explanation. Briefly outline the process (steps) to determine whether 'potential' ordinary shares are in fact, 'dilutive'.
Part Three
The following information relates to Russell Ltd for the year ending 30 June 2012:
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Profit after tax for the Year Ending 30 June 2012
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$2 100 000
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Dividends on 200 000 convertible cumulative preference shares
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$100 000
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The preference shares have been disclosed as equity in the statement of financial position. There were 250 000 fully paid ordinary shares as at 1 July 2011. There were no additional shares issued during the year.
Additional Information
During the year ending 30 June 2012:
- Russell Ltd had issued $500 000 in convertible debentures which paid interest at a rate of 5% per annum. They could be converted into 100 000 ordinary shares at the option of the debenture holders.
- 250 000 share options had been issued, exercisable at $2.50 per option. The holder of each option has the right to purchase one share. The average share price in respect of ordinary shares for the year ending 30 June 2012 was $2.75 per share.
- 200 000 convertible cumulative preference shares had been issued and are convertible into 80 000 ordinary shares at the option of the preference shareholders.
- The company tax rate is 30% per annum.
Required
Calculate the following showing all steps applied and workings:
(i) Basic earnings per share for the year ending 30 June 2012.
(ii) The diluted earnings per share for the year ending 30 June 2012. Show all workings for each step involved in determining which potential ordinary share is in fact, dilutive.