Basic and Diluted EPS and Actual Conversion of Stock Options The company had 90,

Question

Basic and Diluted EPS and Actual Conversion of Stock Options The company had 90,000 shares of common stock outstanding on January 1. In addition, as of January 1, the company had issued stock options that allowed employees to purchase 39,000 shares of common stock. The option exercise price is $12 per share. The options were exercised on April 1. The average stock price for the year was $18; the stock price on the option exercise date (April 1) was $17. The company has no other potentially dilutive securities. Net income for the year was $200,000. In your computations, round all weighted-average number of shares to the nearest whole number. Round the earnings per share to the nearest cent.

Compute basic earnings per share.

$ 1.68 per share

Compute diluted earnings per share.

$ ??? per share

Explanation / Answer

(i) Calculation of Basic Earning per share

Net Profit for the year $200,000

Number of equity share outstanding 90,000

Basic EPS ( $200,000/90,000) $2.22

(II) Calculation of Diluted Earnings Per Share

Net profit for the year $200,000

Number of Equity share outstanding 90,000

Number of shares under stock option 39,000

Less: Number of shares that would

have been issued at fair value

(39,000 * 12/18) (26,000) 13000 103,000

Dilluted Earning per share ($200,000/103,000) $1.942

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