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The R Company had a net income of $700,000 for the year, and 100,000 shares of...

The R Company had a net income of $700,000 for the year, and 100,000 shares of common stock outstanding. R did not have any preferred stock outstanding. The Company had 10,000 stock options outstanding. The exercise price of each option is $8.  The average market price of common stock for the year was $15 a share, and the year-end market price was $20 a share. What is the diluted earnings per share?

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Answer #1

Solution:

Amount to be paid for stock option = 10000*8 = $80,000

Value of option in current shares = Amount paid to exercise option / Average market price = $80,000 / 15= 5333 shares

Diluted shares = Option issued - Value of option in current shares= 10000 - 5333 = 4667

Total weighted average outstanding shares in future = 100000 + 4667 = 104667 shares

Diluted earning per share = Net income / Future weighted average outstanding shares = $700,000 / 104667 = $6.69 per share

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