Question

Witter House is a calendar-year firm with 370 million common shares outstanding throughout 2018 and 2019. As part of its executive compensation plan, at January 1, 2017, the company had issued 30 million executive stock options permitting executives to buy 30 million shares of stock for $15 within the next eight years, but not prior to January 1, 2020. The fair value of the options was estimated on the grant date to be $2 per option.

In 2018, Witter House began granting employees stock awards rather than stock options as part of its equity compensation plans and granted 25 million restricted common shares to senior executives at January 1, 2018. The shares vest four years later. The fair value of the stock was $20 per share on the grant date. The average price of the common shares was $20 and $25 during 2018 and 2019, respectively.

The stock options qualify for tax purposes as an incentive plan. The restricted stock does not. The company's net income was $220 million and $230 million in 2018 and 2019, respectively. Its income tax rate is 40%.

Required:
1. Compute basic and diluted earnings per share for Witter House in 2018.
2. Compute basic and diluted earnings per share for Witter House in 2019.

Answer 1

Basic EPS	(Net Income - Preferred Dividends) / Weighted average number of common shares outstanding)
Diluted EPS	(Net Income - Preferred Dividends) / Weighted average number of common shares outstanding)

2018	Net Income	Preferred Dividends	Weighted average number of common shares outstanding
Basic EPS	$ 220,000,000	$          -	370,000,000	$                  0.59
Diluted EPS	$ 220,000,000	$          -	382,750,000	$                  0.57
2019
Basic EPS	$ 230,000,000	$          -	370,000,000	$                  0.62
Diluted EPS	$ 230,000,000	$          -	400,600,000	$                  0.57

W.N
Weighted average number of shares held in 2018	370,000,000
Number of exercisable options granted as shares	30,000,000
Number of shares assumed reacquiresd as Treasury Stock ((30000000*15)+(30000000*2/3))/20	-23,500,000
Number of exercisable awards granted as shares	25,000,000
Number of shares assumed reacquiresd as Treasury Stock (((25000000*20/4)*3)/20)	-18,750,000
Total Weighted average number of shares	382,750,000
Weighted average number of shares held in 2019	370,000,000
Number of exercisable options granted as shares	30,000,000
Number of shares assumed reacquiresd as Treasury Stock ((30000000*15)/25)	-18,000,000
Number of exercisable awards granted as shares	25,000,000
Number of shares assumed reacquiresd as Treasury Stock (((55000000*2)+((25-20)*25000000*40%))/25)	-6,400,000
Total Weighted average number of shares	400,600,000