Question

Myers Drugs Inc. has 3 million shares of stock outstanding. Earnings after taxes are $6 million. Myers also has warrants outstanding that allow the holder to buy 100,000 shares of stock at $10 per share. The stock is currently selling for $50 per share. a. Compute basic earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.) b. Compute diluted earnings per share considering the possible impact of the warrants. Assume the cash proceeds are used to repuchase shares. (Do not round intermediate calculations and round your answer to 2 decimal places.) Use the following formula:

Answer 1

(a)-Basic earnings per share

Basic earnings per share = Total Earnings / Number of common shares outstanding

= $60,00,000 / 30,00,000 Common shares outstanding

= $2.00 per share

“Basic earnings per share = $2.00 per share”

(b)-Diluted earnings per share

Net Increase in common shares from warrants = Number of common shares outstanding – [100,000 Shares x 10/15]

= 100,000 Shares – 20,000 Shares

= 80,000 Shares

Hence, the Diluted earnings per share = Total Earnings / [Number of common shares outstanding + Net Increase in common shares from warrants]

= $60,00,000 / [30,00,000 Shares + 80,000 Shares]

= $60,00,000 / 30,80,000 Shares

= $1.95 per share

“Diluted earnings per share = $1.95 per share”