 # Question & Answer: On 1/1/16 a firm had 200,000 shares of common stock issued and outstanding…..

On 1/1/16 a firm had 200,000 shares of common stock issued and outstanding

3/1                   another 300,000 issued

5/1                   a 10% stock dividend declared

7/1                   10,000 shares of treasury stock acquired

10/31             2 for 1 stock split

12/31             added 20,000 new shares issued

A) What is the weighted average number of shares of common stock for the year?

B) Assume company had issued stock options that can be exchanged for 50,000 shares of common stock for \$10/sh. Market price is \$12/sh. Par value is \$5 per sh. NI = 400,000 and the tax rate is 40%. What is the diluted EPS?

Part A)

Calculation of weighted average number of shares of common stock

Number of shares as on 1.01.2016 = 200,000

Add: New shares issued (300,000*10/12) = 250,000

Add: Stock dividend (10% of 500,000) = 50,000

Less: Treasury stock acquired (10,000*6/12) = (5,000)

Weighted average number of shares = 495,000

Weighted average number of shares after stock split = 495,000 * 2 = 990,000

Part B)

Calculation of Diluted EPS

Net Income = 400,000

Net Income after taxes @40% = 400,000 * (1- 0.40)

= 240,000

Weighted average number of shares (as calculated in above Part A) = 990,000

Potential number of shares of common stock = 50,000 – [(50,000 * \$10) / \$12]

= 8,333

Total weighted average number of shares = 990,000 + 8,333 = 998,333

Diluted EPS = (240,000 / 998,333)

= \$ 0.2404