Question

On January 1, 2016, Blossom Company issued 10-year, $ 104,000 face value, 6% bonds at par (interest payable annually on January 1). Each $ 1,100 bond is convertible into 32 shares of Blossom $2 par value common stock. The company has had 11,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2017. Blossom also has adopted a stock-option plan that granted options to key executives to purchase 6,600 shares of the company’s common stock. The options were granted on January 2, 2016, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expired 6 years from the date of grant. The option price was set at $5, and the fair value option-pricing model determines the total compensation expense to be $ 23,000. All of the options were exercised during the year 2018: 3,300 on January 3 when the market price was $7, and 1,100 on May 1 when the market price was $8 a share. (Ignore all tax effects.)

Blossom’s net income in 2017 was $ 36,300. Compute basic and diluted earnings per share for Blossom for 2017. Blossom’s average stock price was $6 in 2017. (Round answers to 2 decimal places, e.g. 15.25.)

diluted earnings per share=?

Answer 1

1)
Basic EPS = Net Income - preferred dividend /Outstanding shares
Basic EPS = $36,300 - $0/11000	$3.30	per share
2)
Diluted EPS
Net Income	$36,300
Less: Preferred Dividend	$0
Interest savings (net of tax) 104,000 x 6%	$6,240
Adjusted Net Income	$42,540
Number of shares under Option	6600	shares
Price per Option	$5.00
Proceeds upon assumed exercise of Option	$33,000.00
Avg Market Price per share of common stock during the year	$6.00
# of shares can be purchased using proceeds from option	5500.00
Excess of shares under option that could be purchased (6600 - 5500)	1000	shares
Diluted EPS = $42540 /( 11000 + 1000)	$3.54	per share