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Throughout 2015, Smith had 200,000 shares of common stock outstanding. Smith's net income for the year...

Throughout 2015, Smith had 200,000 shares of common stock outstanding. Smith's net income for the year ended December 31, 2015 was $880,000. Smith's income tax rate is 20%.


During the entire year ending 12-31-15, Smith had 15,000 outstanding employee stock options. Each option had an exercise price of $60 per share of Smith common stock. During the year ended 12-31-15, the average market price of Smith's common stock was $50 per share.


As of 12-31-15, Smith had $10,000,000 of 10% convertible bonds. Smith issued the bonds at face value during 2012. The bonds can be converted into 250,000 shares of Smith's common stock.


What will Smith report as its diluted earnings per share for the year ended 12-31-15?

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Answer #1

Formula to calculate diluted earnings per share for the year ended `12-31-15 = (net income- preference dividends) / (common shares outstanding+unexercised employee stock option+convertible preference stock+convertible bond+warrants)

given, common shares outstanding = 200000

net income = 880000

outstanding employee stock options = 15000

convertible debt can be converted into 250000 shares of common stock

applying this to formula: diluted EPS = 880000-0/(200000+15000+250000)

=880000/465000 = 1.89 per share.

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