Stanley Department Stores reported net income of $720,000 for the year ended Dec

Question

Stanley Department Stores reported net income of $720,000 for the year ended December 31, 2018. Additional Information: 80,000 24,000 Common shares outstanding at Jan. 1, 2018 Incentive stock options (vested in 2017) outstanding throughout 2018 (Each option is exercisable for one common share at an exercise price of $37.50) During the year, the market price of Stanley's common stock averaged $45 per share. On Aug. 30, Stanley sold 15,000 common shares. Stanley's only debt consisted of $50,000 of 10% short term bank notes. The company's income tax rate is 40%. Required: Compute Stanley's basic and diluted earnings per share for the year ended December 31, 2018.

Explanation / Answer

Solution:

Weighted average outstanding shares = 80000*8/12 + 95000*4/12 = 85000 shares

Net Income for 2018 = $720,000

Basic EPS = Net Income / Weighted average outstanding shares = $720,000 / 85000 = $8.47 per share

Computation of Diluted EPS:

Amount to be paid for stock option = 24000*$37.50 = $900,000

Value of option in current shares = Amount paid to exercise option / Current market price = $900,000 / 45 = 20000 shares

Diluted shares = Option issued - Value of option in current shares= 24000 - 20000 = 4000 shares

Diluted EPS = Net income / (Weighted average outstanding shares + Diluted shares on stock option)

= $720,000 / (85000 + 4000) = $8.09 per share

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