Question

During 2021, Falwell Inc. had 520,000 shares of common stock and 52,000 shares of 9% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2021. Falwell's net income for the year ended December 31, 2021, was $2.7 million. The income tax rate is 25%. Falwell granted 11,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 22 shares of common stock at an exercise price of $31 per share. The options vest after one year. The market price of the common stock averaged $32 per share during 2021. What is Falwell's basic earnings per share for 2021, rounded to the nearest cent?

Answer 1

Answer:

$4.29

Explanation:

earnings per share = (net income - preferred stock dividends) / weighted average of common stocks outstanding

• net income = $2,700,000
• preferred stock dividends (since they are cumulative they must be included in this calculation) = 52,000 x 9% x $100 =  $468,000
• weighted average of common stocks outstanding = 520,000 stocks, since no new stocks were issued during 2021

earnings per share (EPS) = ($2,700,000 - $468,000) / 520,000 stocks = $2,232,000 / 520,000 stocks = $4.2923 ≈ $4.29