During 2018, Falwell Inc. had 500,000 shares of common stock and 50,000 shares o

Question

During 2018, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative, nonconvertible preferred stock outstanding. The preferred stock has a pat value of $100 per share. Falwell did not declare or pay any dividends during 2018. Falwell's net income for the year ended December 31, 2018, was $2.5 million. The income tax rate is 40%. Falwell granted 200,000 fully-vested stock options to its executives on January 1 of this year. Each option gives its holder the right to buy one share of common stock at an exercise price of $29 per share. The market price of the common stock averaged $30 per share during 2018. What is Falwell's basic earnings per share for 2018, rounded to the nearest cent? What is Falwell's diluted earnings per share for 2018, rounded to the nearest cent?

Explanation / Answer

Falwell Basic EPS = (Net Income after taxes-preferred Dividend)/weighted no. of shares outstanding = =(2500000-5000000*6%)/500000 = 4.4 Diluted EPS = =2200000/506666.667 (See working Notes below) 4.34210526 Net profit attributable to common stockholders No. of equity shares Net profit attributable per shares Net Income 2200000 A 500000 4.4 Basic Incentive stock Options 0 B 6666.66667 Total 2200000 C=A+B 506666.667 4.34210526 Dilutive

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