Question

Weaver Company had 100,000 shares of common stock issued and outstanding at January 1. On July 1, Weaver issued a 10% stock dividend. Unexercised call options to purchase 20,000 shares of Weaver’s common stock (adjusted for the stock dividend) at $20 per share were outstanding at the beginning and end of the year. The average market price of Weaver’s common stock (which was not affected by the stock dividend) was $25 per share during the year. Net income for the year ended December 31 was $550,000. What should be Weaver’s diluted earnings per share (DEPS) for the year?

Answer 1

Answer: $4.82

Explanation: Diluted EPS is a calculation used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. It can be said to be a profitability calculation that measures the amount of income each share will receive if all of the diluted securities are realized

From the above question, the DEPS is calculated thus:

Proceeds from unexercise call options(20,000 shares × $20)=$400,000

Treasury shares = $400,000/$25 = 16,000

Purchased shares = 20,000 -16,000 = 4,000

Therefore Incremental shares = 4,000

The incremental shares of 4,000 + 100,000+10% stock dividend of 10,000 = 114,000 shares.

DEPS = $550,000/114,000 = 4.82