Stanley Department Stores reported net income of $881,000 for the year ended Dec

Question

Stanley Department Stores reported net income of $881,000 for the year ended December 31, 2018. Additional Information: Common shares outstanding at Jan. 1, 2018 Incentive stock options (vested in 2017) outstanding throughout 2018 (Each option is exercisable for one common share at an exercise price of $26.50) During the year, the market price of Stanley' s common stock averaged $31.8 per share. On Aug. 30 Stanley sold 15,000 common shares. Stanley's only debt consisted of $43,000 of 10% short term bank notes. The company's income tax rate is 40%. 125,000 36,000 Required Compute Stanley's basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in thousands.) Numerator Denominator Earnings per Share Basic EPS Diluted EPS

Explanation / Answer

Solution:

Basic EPS = Earning available for equity shareholders / Weighted average outstanding shares

Weighted average outstanding shares = (125000*8/12) + (140000*4/12) = 130000 shares

Earnings for commons shareholders = $881,000

Basic EPS = $881,000 / 130000 = $6.78 per share or $0.00678 thousand per share

Amount to be paid for stock option = 36000*26.50 = $954,000

Value of option in current shares = Amount paid to exercise option / Current market price = $954,000 / 31.80 = 30000 shares

Diluted shares = Option issued - Value of option in current shares= 36000 - 30000 = 6000

weighted average shares for future = 130000 + 6000 = 136000 shares

Diluted EPS = $881,000 / 136000 = $6.48 per share or 0.00648 thousans per share.

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