Exercise 16-26 Venzuela Company’s net income for 2014 is $46,000. The only poten

Question

Exercise 16-26

Venzuela Company’s net income for 2014 is $46,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2013, each exercisable for one share at $8. None has been exercised, and 11,400 shares of common were outstanding during 2014. The average market price of Venzuela’s stock during 2014 was $20.

(a) Compute diluted earnings per share. (Round answer to 2 decimal places, e.g. $2.55.)

(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2014 (rather than in 2013). The average market price during the last 3 months of 2014 was $20. (Round answer to 2 decimal places, e.g. $2.55.)

$

Explanation / Answer

a) Basic Earnings per share=Earnings/Outstanding shares=$46,000/11,400=$4.035

Option excercise price=$8

so outstanding shares to be considered in dilute earning per share=($20-$8)*1000/$20=$12,000/$20=600 shares

Diluted earnings per share=$46,000(11,400+600)=$46,000/12,000=$3.83

b) Even through the options were issed on october 1 2014, if not excercised theses shares then the Diluted earngins per share is equal to above=$46,000/12,000=$3.83

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