Burnet Company had 30,000 shares of common stock outstanding on January 1, 2011.

Question

Burnet Company had 30,000 shares of common stock outstanding on January 1, 2011. On April 1, 2011, the company issued 15,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock was $9. The company reported net income in the amount of $189,374 for 2011. What is the effect of the options?
A. The options will dilute EPS by $.33 per share.
B. The options will dilute EPS by $.09 per share.
C. The options are anti-dilutive.
D. The options will dilute EPS by $.17 per share.

Explanation / Answer

Details No Duration months Duration weight Wtd No Opening common stock                30,000                    12 100%             30,000 Apr 1 issue of shares                15,000                      9 75%             11,250 No of share for Basic EPS               41,250 Net Income                189,374 BASic EPS = $                4.59 per share Stock option no of shares                    5,000 Market Price of shares                           9 Stock option exercise price                          10 No of shares that can be purchased at fair value =5000*9/10=                  4,500 No no of shares issued for no consideration =                    (500) Effective no of share for Diluted EPS=                40,750 Diluted EPS = $                4.65 So the options are anti dilutive Answer C is correct.

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