Question

Flounder Company’s net income for 2020 is $54,400. The only potentially dilutive securities outstanding were 1,400 options issued during 2019, each exercisable for one share at $6. None has been exercised, and 9,300 shares of common were outstanding during 2020. The average market price of Flounder’s stock during 2020 was $25.

(a) Compute diluted earnings per share. (Round answer to 2 decimal places, e.g. $2.55.)
(b) Assume the same facts as those assumed for part (a), except that the 1,400 options were issued on October 1, 2020 (rather than in 2019). The average market price during the last 3 months of 2020 was $25. (Round answer to 2 decimal places, e.g. $2.55.)

Answer 1

Answer-

a) Diluted earnings per share

= (Total income - preference dividends) /( outstanding shares + diluted shares)

Amount paid towards shares = Options issued * Exercise price per share = 1,400 * 6 = $ 8,400

Value of options = Amount paid towards shares / Current market price = $ 8,400 /$ 25 = 336

Diluted shares = Options issued - value of options = 1,400 - 336 = 1,064

So Diluted Earnings per share = ( 54,400) / ( 9,300 +1,064) = $ 5.25 per share.

b) Calculation of diluted shares 1,064 (same as above )

Weighted average for the period holding i.e, 3 months =1,064 *3/12 = 266 shares increased during the period.

Diluted EPS = 54,400 /(9,300 +266) = $ 5.69 per share

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