Question

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Stellar Company’s net income for 2017 is $45,200. The only potentially dilutive securities outstanding were 800...

Stellar Company’s net income for 2017 is $45,200. The only potentially dilutive securities outstanding were 800 options issued during 2016, each exercisable for one share at $6. None has been exercised, and 10,100 shares of common were outstanding during 2017. The average market price of Stellar’s stock during 2017 was $25.

(a) Compute diluted earnings per share.

(b) Assume the same facts as those assumed for part (a), except that the 800 options were issued on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of 2017 was $25.

Expert Solution

a) Compute diluted earnings per share for 2017

.Proceeds if shares issued (800 x $6) $4,800

Purchase price for treasury shares ÷25$

Shares assumed purchased 192

Shares assumed issued 800

Incremental share increase 608

a) Compute diluted earnings per share for 2012.

When calculatingDiluted EPS, begin withBasicEPS.

=$45,200/(10,100+608)=$4.22

(b) Compute diluted earnings per share assuming the 800 options were issued on October 1, 2017.

Proceeds if shares issued (800 x $6) $4,800

Purchase price for treasury shares ÷ 25$

Shares assumed purchased 192

Shares assumed issued 800

Incremental share increase x 608.

Weight for 3 months assumed outstanding 3/12

Weighted incremental share increase 152

(b) Compute diluted earnings per share assuming the 1,000options were issued on October 1, 2012.

Diluted EPS 45200/(10100+152)

=45200/10252

=4.41

(Ignore antidilutive securities in all calculations and incomputing diluted earnings per share.)

ekkarill92 answered 2 years ago

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