Fugate Company had 900,000 shares of common stock issued and outstanding at Dece

Question

Fugate Company had 900,000 shares of common stock issued and outstanding at December 31, 2014. On July 1, 2015 an additional 750,000 shares were issued for cash. Fugate also had stock options outstanding at the beginning and end of 2015 which allow the holders to purchase 225,000 shares of common stock at $20 per share. The average market price of Fugate's common stock was $25 during 2015. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2015?

1,331,250

1,455,000

1,695,000

1,320,000

900,000 + (750,000 × 6/12) + [(25 – 20)/25 × 225,000] = 1,320,000.

Can you please explain the components of this answer? Why 6/12 of 750k. I know that additional shares were issued July 1 but why are we having to take 6/12? Why (25-20)/25? Doesn't that calculate the change instead of the average? I've been out of school too long.

Explanation / Answer

Weighted average No. of shares:

Opening Shares = 900000

July 15 ( 750000*6/12) = 375000 (because this is hold only for 6 month for year 2015)

Stock options (25-20)/25 * 225000 = 45000

Total weighted average no. of shares = 1320000 shares

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