Venzuela Company’s net income for 2014 is $41,300. The only potentially dilutive

Question

Venzuela Company’s net income for 2014 is $41,300. The only potentially dilutive securities outstanding were 1,200 options issued during 2013, each exercisable for one share at $8. None has been exercised, and 10,800 shares of common were outstanding during 2014. The average market price of Venzuela’s stock during 2014 was $25.

(a) Compute diluted earnings per share.

(b) Assume the same facts as those assumed for part (a), except that the 1,200 options were issued on October 1, 2014 (rather than in 2013). The average market price during the last 3 months of 2014 was $25.

Explanation / Answer

b)

a) Basic EPS of the firm = 41,300 / 10,800 $      3.82 Assuming that the options were exercised at the beginning of the year Increamental number of shares = (Market price - Option price / Market price) x Number of options 816 Diluted EPS = 41300 + 0 / 10800+816 $      3.56

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