Ian Co. is calculating earnings per share amounts for inclusion in Ian’s annual

Question

Ian Co. is calculating earnings per share amounts for inclusion in Ian’s annual report to shareholders. Ian has obtained the following information from the controller’s office as well as shareholder services:

Net income from January 1 to December 31 $125,000
Number of outstanding shares:
January 1 to March 31 15,000
  April 1 to May 31 12,500
  June 1 to December 31 17,000

In addition, Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a year-end market price of $25 per share. What amount is Ian’s diluted earnings per share for the year ended December 31?
a. $4.63
b. $4.85
c. $7.35
d. $7.94

PLEASE SHOW WORK. How do you get 7.94?

Explanation / Answer

We first calculate the weighted average outstanding shares during the year =

(15000 * 3 months + 12500 * 2 months + 17000 * 7 months) / 12 months = 15750 outstanding shares

Earning Per Share as on Dec 31 = Net Income / Weighted average outstanding shares

= $125,000 / 15750 = $7.94 per share

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