Witter House is a calendar-year firm with 310 million common shares outstanding throughout 2018 and 2019....

Witter House is a calendar-year firm with 310 million common shares outstanding throughout 2018 and 2019. As part of its executive compensation plan, at January 1, 2017, the company had issued 35 million executive stock options permitting executives to buy 35 million shares of stock for $12 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 $14 per share on the grant date. The average price of the common shares was $14 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 $160 million and $170 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.

Expert Solution

The share or portion of profit earned by each share for company is called as earning per share. If the number of potential shares increase due to conversion or exercise, the basic EPS gets diluted.

Calculation of EPS 2018
		Description
(1) Net income ($ in million)	160
(2) Common share outstanding (No. in million)	310
(3) Basic EPS (in $)	0.5161	(1)/(2)

(4) Equivalent Restricted common share issued ( No. in million)	20	(20 x $14/$14)
(5) Equivalent Total number of share outstanding (in million)	330	(2) + (4)
(6) Diluted EPS (in $)	0.4848	(1)/(5)


Calculation of EPS 2019
		Description
(1) Net income ($ in million)	170
(2) Common share outstanding (No. in million)	310
(3) Basic EPS (in $)	0.5484	(1)/(2)

(4) Equivalent Restricted common share issued ( No. in million)	14	(20 x $14/$20)
(5) Equivalent Total number of share outstanding (in million)	324	(2) + (4)
(6) Diluted EPS (in $)	0.5247	(1)/(5)

NOTE:
The restricted share does not qualify for tax purpose and therefore no tax effect.
It is assumed that stock awards are given in place of stock option and hence there are no stock option are relevent for EPS calculation.

ekkarill92 answered 2 years ago

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