Question

q.28

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.

(For all requirements, do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places (i.e., 10,000,000 should be entered as 10.00).)

Answer 1

1&2 Computation of Basic EPS & Diluted EPS for Witter house in 2018 &2019:

Basis EPS =	Net income after tax/ Total no. of shares outstanding
Net income after tax =	Net income - tax on income
2018	$220-($220*40%) = $132
2019	$230-( $230*40%) = $138
Basis EPS =	Net income after tax/ Total no. of shares outstanding
2018	$132/370
	.36 EPS
2019	$138 / 370
	.37 EPS
Compute diluted earnings per share for 2018
Net income after tax for 2018	$220-($220*40%) = $132
Diluted shares =	370+25   = 395
Diluted EPS	$132/395
	0.33 EPS
Compute diluted earnings per share for 2019
Net income after tax for 2019	$230-( $230*40%) = $138
Diluted shares =	370+25   = 395
Diluted EPS	$138/395
	0.35 EPS