During 2014, Fit Inc. had 500,000 shares of common stock and 50,000 shares of 6%

Question

During 2014, Fit Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding.

The non-convertible preferred stock has a par value of $100 per share.

Fit did not declare or pay any dividends during 2014.

Fit's net income for the year ended December 31, 2014, was $2.5 million.

The income tax rate is 40%.

Fit granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share.

The market price of the common stock averaged $30 per share during 2014, and the stock price on December 31, 2014 was $32 per share. .

A)What is the basic earnings per share reported by Fit Inc. for 2014 ?

B)What is the diluted earnings per share reported by Fit Inc. for 2014?

Explanation / Answer

a) diluted earning = (Net income - preferred dividends)/ outstanding common shares

                               = ( 2,500,000 -   50,000*100*6%)/ 500,000

                                = $4.4

b)10,000 *20 * 29                    = $5,800,000

5800,000/30                            = 193,333 shares

hence 200,000 - 193,333         = 6667 shares

total outstanding                   = 506,667

Diluted earnings per share = 2200,000/506,667     = $4.34

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