Question

On December 31, 2017, Brisbane Company had 100,000 shares of common stock outstanding and 23,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2018, Brisbane purchased 17,000 shares of common stock on the open market as treasury stock paying $33 per share. Brisbane sold 5,300 treasury shares on September 30, 2018, for $38 per share. Net income for 2018 was $173,905. Also outstanding during the year were fully vested incentive stock options giving key personnel the option to buy 43,000 common shares at $33. The market price of the common shares averaged $43 during 2018. Required: Compute Brisbane's basic and diluted earnings per share for 2018. (Round your answers to 2 decimal places.)

Answer 1

Solution:

Computation of Basic EPS:

Weighted average outstanding common shares =100000*2/12 + 83000*7/12 + 88300*3/12 = 87158 shares

Net income for 2018 = $173,905

Preferred dividend = 23000*$50*7% = $80,500

Earning for common share holder = Net Income - Preferred dividend = $173,905 - $80,500 = $93,405

Basic EPS = Earning for common shareholders / Weighted average outstanding shares

= $93,405 / 87158 = $1.07 per share

Computation of Diluted EPS:

Amount to be paid for stock option = 43000*33 = $1,419,000

Value of option in current shares = Amount paid to exercise option / Current market price = $1,419,000 / $43 = 33000 shares

Diluted shares = Option issued - Value of option in current shares= 43000 - 33000 = 10000 shares

Diluted EPS = Earning available for common shareholders / weighted average outstanding shares after considering dilutive shares

= $93,405 / (87158 + 10000) = $0.96 per share