Question

During 2009, Solar Corporations earned profits amounting to $4.5 million and paid preference dividends amounting to $100,000. The company had 3.5 million shares outstanding throughout the year with an average market price of $50. It also had 50,000 stock options outstanding, which had an exercise price of $40. Given that the market price of the company’s shares at year‐end was $60 and that the company pays taxes at the rate of 35%, its diluted EPS using the treasury stock method is closest to:

Answer 1

Net income after tax	$     4,500,000
Less: dividend to preferred stock	$         100,000
Net income available for common stock holders	$     4,400,000
Stock options
Cash flow from the options exercised (50000*40)	$     2,000,000
Number of stock options outstanding	50,000
Less: Number of share purchased using average market price (2000000/50)	40,000
Number of common shares adjusted from the exercise of options	10,000

Dilutive earning per share
	Adjusted Net income	Divided by: Potential common share	Per share	Nature
					As per Basic Earning per share	$ 4,400,000	3,500,000	$      1.257
					Add: options	$                  0	10,000		Dilutive
Dilutive Earning per share	$ 4,400,000	3,510,000	$      1.254
Diluted Earnings per share			$      1.254
Diluted EPS using the treasury stock method is closest to			$      1.254