At December 31, 2015, Destin Sports Equipment had 200,000 common shares issued a

Question

At December 31, 2015, Destin Sports Equipment had 200,000 common shares issued and outstanding. On May 31, 2016, Destin issued a 15% stock dividend. Fully vested, incentive stock options issued in 2014 and exercisable for 40,000 shares (adjusted for the stock dividend) were outstanding at the end of 2016, with an exercise price of $40 per share. The market price of Destin’s common stock averaged $50 per share during 2016. Also outstanding since 2010 were $100,000 of 10% bonds issued at face value and convertible into 30,000 common shares. Destin’s tax rate is 40% and 2016 net income was $550,000.

What is Destin’s 2016 diluted earnings per share?

Explanation / Answer

Weighted avg.no. of common shares Months Opening Balance 200000 5/12 MONTHS 83333.33 Stock Dividend (from statrting of the year to be taken) 200000*15% 30000 So total shares 230000 12/12 months 230000 Weighted avg Diluted EPS= Net Income-After Tax Interest/ Weighted avg. No of shares+Potential common shares (550000+6000)/(230000+112000) 1.626 Ans $1.63 rounded off Stock Option Assumed excersied 40000*40 1600000 No. of shares at market value 1600000/50 32000 So potential shares 40000-32000 80000 Convertible bonds into common stock 112000 After Tax interest 100000*10%*60% 6000

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