On January 1, 2018, United Airlines had 13,000 shares of common stock outstandin

Question

On January 1, 2018, United Airlines had 13,000 shares of common stock outstanding and 5,000 shares of 6% $100 par, cumulative preferred stock outstanding. It also had stock options giving key personnel the option to buy 7,000 common shares at $30 each. Net income for 2018 was 41,000. Tax rate 40%. The average market price during 2018 was $40 per common share.

Compute the basic EPS for 2018 for United Airlines corp.

.65

.79

.85

1.77

Compute the diluted EPS for 2018 United Airlines orp.

2.78

1.83

4.81

.75

Explanation / Answer

Solution 1:

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

Earning for common shareholders = Net Income - Preferred dividend = $41,000 - ($500,000 * 6%) = $11,000

Basic EPS = $11,000 / 13000 = $0.85 per share

Hence 3rd option is correct.

Solution 2:

Computation of Diluted EPS:

Amount to be paid for stock option = 7000*30 = $210,000

Value of option in current shares = Amount paid to exercise option / Current market price = $210,000 / 40 = 5250 shares

Diluted shares = Option issued - Value of option in current shares= 7000 - 5250 = 1750 shares

Diluted EPS = Earning for common shareholders / (Outstanding shares + Diluted shares)

= $11000 / (13000 + 1750) = $0.75

Hence last option is correct.

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