Question

Stanley Department Stores reported net income of $920,000 for the year ended December 31, 2021.

Additional Information:

Common shares outstanding at Jan. 1, 2021	135,000
Incentive stock options (vested in 2020) outstanding throughout 2021	36,000
(Each option is exercisable for one common share at an exercise price of $27.50)
During the year, the market price of Stanley’s common stock averaged $33.00 per share.
On Aug. 30, Stanley sold 15,000 common shares.
Stanley’s only debt consisted of $45,000 of 10% short-term bank notes.
The company’s income tax rate is 25%.

Required:

Compute Stanley’s basic and diluted earnings per share for the year ended December 31, 2021. (Enter your answers in thousands. Do not round intermediate calculations)

	Numerator	/	Denominator	=	Earnings per Share
Basic	$690,000	/	140,000	=	$4.93
Diluted	$690,000	/	146,000	=	$4.73

Answer 1

1) Basic EPS = (Total Income - Preferred Dividends)/Average outstanding shares

= ($920000 + $0) / 140000

= $920000 / 140000

= $6.57 per share

Average Outstanding Shares = Outstanding Shares + Shares issued on 30 August

= 135000 + (15000*(4/12))

= 135000 + 5000

= 140000 shares

2) Diluted EPS :-

Diluted EPS = (Total Income - Preferred Dividends)/(Average Outstanding Shares+Diluted Shares)

= ($920000 - $0) / (140000+6000)

= $920000 / 146000

= $6.30

Diluted Shares :-

Diluted Shares = (36000 - 30000) = 6000 shares

Total Options Exercise Price = (No. of Options * Exercise Price)

= 36000 * $27.50

= $990000

No. of Shares = Total Options Exercise Price / Market Price of share

= $990000 / $33

= 30000 shares