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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?
Expert Answer
Answer)
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
