Step by Step Calculations: Mr. Davis, the chief executive officer and chief technical officer of Orchid Technologies Ltd (OTL), is a brilliant scientist. Under his guidance and leadership, OTL has grown from a promising start-up to the successful company it is today.
Mr. Davis, the chief executive officer and chief technical officer of Orchid Technologies Ltd (OTL), is a brilliant scientist. Under his guidance and leadership, OTL has grown from a promising start-up to the successful company it is today. With little knowledge of accounting and finance, Mr. Davis has always relied on the company’s chief financial officer, Ms. Cup to provide him with financial information and answer any finance and accounting related questions.
On one Sunday afternoon, you receive a call from Mr. Davis asking you to meet him for coffee at the local cafe. He explains that an important shareholder of the company, Mr. Fence who owns 40% of the company’s shares, is visiting the city and has asked for a meeting the next day. Ms.
Cup, an enthusiastic outdoor person, is on a three-month sabbatical trekking the Nullarbor Plain in Australia and is uncontactable. As you have a knowledge of accounting, Mr. Davis would like your help in reviewing some financial data.
Over a cup of steaming coffee, Mr. Davis gives you the following information relating to the company’s draft quarterly financial statements (prepared by Ms. Cup) ended 31 March 20X1.
(1) The Statement of Changes in Owner’s Equity shows the following information on 31
$ No of shares
Share Capital $1,000,000 1,100,000
Treasury Shares $250,000 100,000 Purchased on 12 Dec 20×0
Retained Earnings $550,000
(2) A notice received by OTL from Pod Technologies Ltd announcing a final dividend of $0.10 per share. The book closure date is 28 March 20×1 while payments are expected to be received only after 15 April 20×1. OTL owns 250,000 shares of Pod Technologies and has recognized the investment as available-for-sale securities.
(3) OTL declared an interim dividend of $0.05 per share. The book closure date was 15 January 20×1 and payment was made on 28 February 20×1.
Using the draft quarterly financial statements prepared by Ms. Cup, Mr. Davis calculated the company’s earnings per share for the quarter ended 31 March 20×1 as $0.20 In his calculations Mr. Davis has included the interim dividend declared by OTL and ignored the dividend from Pod Technologies as the payment was expected to be received only in April 20×1.
(4) Mr. Davis explains that the important shareholder is planning to sell 20% of his shareholding to Redrock Investments Inc., a global investment corporation. The market price of OTL’s share is $2.75.
(i) Identify and explain the errors made by Mr. Davis while calculating the earnings per
(ii) Calculate the correct EPS. What does this ratio indicate?
(iii) Briefly explain the meaning of treasury shares.
(iv) Explain if the sale of shares by Mr. Fence to Redrock Investments Inc. will impact OTL’s share capital.
(v) Calculate the book value of OTL’s share and give any one possible reason why its market price is different from its book value.