PLEASE DO ASAP Witter House is a calendar-year firm with 320 million common shares outstanding throughout...

PLEASE DO ASAP

Witter House is a calendar-year firm with 320 million common shares outstanding throughout 2018 and 2019. As part of its executive compensation plan, at January 1, 2017, the company had issued 40 million executive stock options permitting executives to buy 40 million shares of stock for $14 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 $3 per option. In 2018, Witter House began granting employees stock awards rather than stock options as part of its equity compensation plans and granted 20 million restricted common shares to senior executives at January 1, 2018. The shares vest four years later. The fair value of the stock was $16 per share on the grant date. The average price of the common shares was $16 and $20 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 $170 million and $180 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).)

	Numerator	/	Denominator	=	Earnings per share
1.	Basic		/		=	$
	Diluted	$	/		=	$

2.	Basic	$	/		=	$
	Diluted		/		=	0

Expert Solution

		Numerator	/	Denominator	=	Earnings per share
1	Basic	170	/	320	=	$ 0.53
	Diluted	170	/	327.5	=	$ 0.52

2	Basic	180	/	320	=	$ 0.56
	Diluted	180	/	342.4	=	$ 0.53


1) Year 2018
EPS = Net income / Outstanding Shares
Basic EPS = $170 /$320	$ 0.5313

Diluted EPS = $170/ 320 + (40 - 37.50 *) + (20 - 15) = 170/327.5	$ 0.52

Reacquired of Shares for assumed exercise of stock option 2018:
Options Issued	40	Millions
X Exercise Price	x 14
	560	Milion
Unexpensed Compensation = $3 x 40 Miilion = $120 ; total compensation to be expensed $40 million per year over 3 years (2017-2019)	40	Milion
Hypothetical proceeds of the options	600	Milion
Divide : Average market price	$ 16.00
*Shares assumed reacquired	37.50	Million shares

Reacquired shares for assumed vesting of restricted stock in 2018
cash proceeds	0	Millions
unexpensed compensation (20 million shares x $16) = $320 million total compensation to be expensed $80 million per year over 4 years. The expense has been recorded in 2018 $80. (320- 80)	240	Millions
Hypothetical proceed	240	Millions
Divide : Average market price	$ 16.00
**Shares assumed reacquired	15.00	Million shares

2) Year 2019
EPS = Net income / Outstanding Shares
Basic EPS = $180 /$320	$ 0.56

Diluted EPS = $180/ 320 + (40 - 28 *) + (20 - 9.60) = 180/342.4	$ 0.55

Reacquired of Shares for assumed exercise of stock option 2018:
Options Issued	40	Millions
X Exercise Price	x 14
	560	Milion
Unexpensed Compensation = $3 x 40 Miilion = $120 ; total compensation to be expensed $40 million per year over 3 years (2017-2019)	0	Milion
Hypothetical proceeds of the options	560	Milion
Divide : Average market price	$ 20.00
*Shares assumed reacquired	28.00	Million shares

Reacquired shares for assumed vesting of restricted stock in 2018
cash proceeds	0	Millions
unexpensed compensation (20 million shares x $16) = $320 million total compensation to be expensed $80 million per year over 4 years. The expense has been recorded in 2018 $80. (320- 80 x2 )	$ 160.00	Millions
Excess tax benefit ($20 - $16 ) x 20 million shares x 40%	$ 32.00	Millions
Hypothetical proceed	$ 192.00	Millions
Divide : Average market price	$ 20.00
**Shares assumed reacquired	9.60	Million shares

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