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Question 29

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Bonita Company’s net income for 2020 is $49,200. The only potentially dilutive securities outstanding were 1,100 options issued during 2019, each exercisable for one share at $6. None has been exercised, and 9,900 shares of common were outstanding during 2020. The average market price of Bonita’s stock during 2020 was $15.

(a) Compute diluted earnings per share. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$

(b) Assume the same facts as those assumed for part (a), except that the 1,100 options were issued on October 1, 2020 (rather than in 2019). The average market price during the last 3 months of 2020 was $15. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$

Answer 1

Answer a. Diluted earnings per share = $4.66

Explanation:

Incremental number of shares = [(Market price – Option price)/Market price] x Number of options

=[($15 - $6) / $15] * 1,100 options = 660 shares

Diluted earnings per share = Net income / (Outstanding shares +Incremental number of shares)

= $49,200 / (9,900 shares + 660 shares)

=  $49,200 /10,560 shares

= $4.66.

Answer b. Diluted earnings per share = $4.89

Explanation:

Adjusted Incremental number of shares = Incremental number of shares (in answer a) * 3 / 12

= 660 shares * 3 / 12 = 165 shares

Diluted earnings per share = Net income / (Outstanding shares +Adjusted Incremental number of shares)

= $49,200 / (9,900 shares + 165 shares)

=  $49,200 /10,065 shares

= $4.89