Question

Corbit Corporation’s 2018 financial statements include the following discussion regarding its use of put options (from Note 9):

During 2016, the company implemented a stock repurchase program to repurchase up to 500,000 shares of stock. In conjunction with the company’s stock repurchase program, the company issues put options that give the purchaser the right to sell shares of Corbit stock to the company at specified prices on specific dates. Recent plan activity is as follows:

                                                                                              Outstanding

                                                                                              Put Options      

      Balance, December 31, 2016                                              500,000

            Options issued                                                                         0

            Options exercised                                                        (100,000)

      Balance, December 31, 2017                                              400,000

            Options issued                                                                         0

            Options exercised                                                                    0

      Balance, December 31, 2018                                              400,000

Corbit’s stock price was $30 per share on 12/31/18, and the company’s stock price averaged $32 per share during 2018. Assume that all outstanding put options are freely exercisable and that all of the outstanding put options on 12/31/18 have an exercise price of $36 per share. Also, assume that Corbit’s net income for 2018 was $10 million and that the company’s weighted-average number of common shares outstanding for 2018 was 4.5 million. Corbit has no other potential common shares.

Required:

1.   Explain and illustrate how the outstanding put options should be reflected in the 2018 diluted EPS calculation (provide the full citation(s) from the FASB codification that supports your answer).

2.   Calculate Corbit’s basic and diluted EPS for 2018.

Answer 1

	Net income available to Common Stockholders ($ Million)	Weighted avg no. of shares outstanding	Per Share
Basic EPS	$                                 10.00	4.50	2.22
Dilutive EPS	$                                 10.00	4.55	2.20

a	Calculation of Basic EPS
		Basic EPS= (Net income- Dividend)/Weighted avg no. of shares outstanding
		Net Income	a	$                      10	million
		Dividend on cumulativ e Preferred stock	b	$                       -
		Weighted avg no. of shares outstanding	c	$                     4.5	million
		Basic EPS	d=(a-b)/c	$                   2.22

b	Calculation of Dilutive EPS
		Dilutive EPS= Net income /Weighted avg no. of shares outstanding considering the effect of dilutive stocks
		Calculation of shares for Put options (A)
		Proceeds if share repurchased	a	$      14,400,000	(400,000*$36)
		Purchase price for treasury shares	b	$                      32
		Share assumed purchased	c=a/b	$            450,000
		Share assumed issued	d	$            400,000
		Incremental share increase		$              50,000
		Weighted avg no. of shares outstanding	a	4.5	million
	Add	Shares assumed to be repurchased
		Stock Put option	b	0.05	million
		Weighted avg no. of shares outstanding	c=a+b	4.55	million
		Net Income	a	$                10.00
	Add	Interest net of tax
		Convertible Bond	b	$                       -
			c=a+b	$                10.00
		Weighted avg no. of shares outstanding after dilution	d	4.55
		Dilutive EPS	e=c/d	2.20
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