During Year4, Rockvale Inc, had 500,000 shares of common stock outstanding Rockv

Question

During Year4, Rockvale Inc, had 500,000 shares of common stock outstanding Rockvale's net income (after tax) for Year4 was $ 800,000. The income tax rate is 40%. rate 40%. Rockvale granted 10,000 stock options to its executives on January 1, Year2. Each option gives its holder the right to buy 10 shares of common stock at an exercise price of $20 per share. The options were fully vested prior to Yeard The market price of the common stock averaged $25 per share during Yeard. 1. What is Rockvale's basic EPS rounded to the nearest cent? 2. What is Rockvale's diluted EPS rounded to the nearest cent?

Explanation / Answer

Solution:

Basic EPS = Net income after tax / Nos of shares = $800,000 / 500000 = $1.60 per share

Amount to be paid for option to be exercised = 10000*10*20 = $2,000,000

Current market price of share = $25 per share

Value in current shares = $2,000,000/25 = 80000 shares

Diluted shares = 100000 - 80000 = 20000 shares

Diluted EPS = $800,000 / (500000+20000) = $1.54 per share

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