Franklin Company had 100 shares of common stock issued and outstanding at Decemb

Question

Franklin Company had 100 shares of common stock issued and outstanding at December 31, 2007. On July 1, 2008, Ferris issued a 10 percent stock dividend. Unexercised stock options to purchase 20 shares of common stock (adjusted for the 2008 stock dividend) at $20 per share were outstanding at the beginning and end of 2008. The average market price of Franklin’s common stock (which was not affected by the stock dividend) was $25 per share during 2008. The ending market price was $40. Net income for the year ended December 31, 2008, was $2,200. What was Franklin’s 2008 diluted earnings per share, rounded to the nearest cent? a. $19.30 b. $20.00 c. $20.20 d. $18.33 ANS: A

Assume a company had net income of $20,000 and 8,000 shares of common stock outstanding the entire year. Also assume there were two potentially dilutive issues outstanding for the entire year: Effect of Assumed Conversion Numerator Denominator #1 $ 8,000 6,000 #2 $ 12,000 5,000 What is diluted earnings per share for this company for the year? a. $2.50 b. $2.40 c. $2.11 d. $2.00 ANS: D

A company earned $20,000 in 2008 and had 20,000 shares of common stock outstanding the entire year. The following four potentially dilutive securities were also outstanding for the entire year. The numerator and denominator effects of the issues are as indicated: Effect of Assumed Conversion Numerator Denominator #1 $ 8,000 12,000 #2 $ 4,000 25,000 #3 $ 6,000 10,000 #4 $ 1,000 12,000 What is diluted EPS? a. $.44 b. $.32 c. $1.00 d. $.81 ANS: A

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Explanation / Answer

Diluted EPS =Net Income Preferred DividendsWeighted Average Number of Dilutive Common Shares

=2200/114= $19.3

Average no. of common shares= 100+10+4

a) Stock dividend= 10 shares, it would be taken as it is because there is no cash transaction involved just the value is deducted from retained earnings. So it is added.

b) Stock option= 4 shares will be added. It is mentioned that 20 stock option were outstanding at the begnning of the year and than some transactions would have taken place so the ending balance was also 20 stock option adjusted for stock dividend. So we will take 20 stock option outstanding at the begnning of the year apart from stock dividend than only we will get the true picture.

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