Question

Corporation had 200,000 shares of common stock outstanding during the current year. There were also fully vested options for 10,000 shares of common stock were granted with an exercise price of $20. The market price of the common stock averaged $25 for the year. Net income was $4 million. What is diluted EPS (rounded)?

Answer 1

Answer: $19.80

Explanation:

Diluted Earnings Per Share is calculated to see the EPS of a company if all covertible securities were converted.

Convertible securities can be Options, preferred shares, debentures etc.

To calculate the diluted Eps, you use the following formula.

= Net Income / Weighted Average of Common Stock + conversion of dilutible securities

To convert the options into securities we do the following,

= (10,000 * 20)/25

= 8000 shares

We will then remove this 8000 shares from the 10,000 shares of common stock to leave us with 2,000.

This is done to account for the no. Of shares at market price.

Plugging in the numbers we have,

= 4,000,000 / 200,000 + 2,000

= 19.801980198

=$19.80

The diluted EPS is $19.80