2. Assume that the following data relative to Kane Company for 2018 is available
ID: 2517100 • Letter: 2
Question
2. Assume that the following data relative to Kane Company for 2018 is available: Net Income (Tax rate of 30%) No dividends were declared in 2018 $2,900,000 Jan. 1. 2018. Beginning number Feb. 1.2018, Purchase of treasury shares June 1, 2018, Stock split 2-1 Oct. 1, 2018, Issuance of shares (80,000) 820,000 100,000 Cumulative 900,000 820,000 1,640,000 1.740,000 ferred Stock Sold at par, convertible into 200,000 shares of common (adjusted for split). $1,200,000 Exercisable at the option price of $30 per share. Average market price in 2018, S32 (market price and option price adjusted for split). 50,000 shares ds at par. Face value $1,000 per bond. Each bond can be converted into 90 shares of common stock. (adjusted for split).Explanation / Answer
Stock options give an employee right to buy the stock of the company at a particular price, which will potentially dilute the firm's stock and increase the number of shares outstanding. Thus the options are dilutive in nature.
Treasury stock method is used to calculate the potential dilution of the firm's stock based on the outstanding stock options. The method assume that the company repurchase its own shares from the proceeds it receive from option to reduce the share count and minimize the effect of dilution.
Calculation of incremental shares
1. Calculate the number of shares to be issued at an excercise price = 50000 shares x $30 per share = $1,500,000
2. Divide the proceed by market price to buyback its shares = $1,500,000/$32 = 46875 shares the comany can purchase.
3. Substract the number of shares purchased from the number of options exercised = 50000 - 46875 = 3125 shares.
Thus the incremental shares are 3125.
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