Harvey Inc. reported net earnings of $700,000 for the year. Harvey has 200,000 shares of common stock outstanding all year. Two years ago, the company granted 20,000 stock options that allow employees to purchase 20,000 shares for $15 each. The company stock has averaged $20 in the market during the year. Compute the basic and diluted EPS.

Question

Quizplus · Accepted Answer

Basic EPS is calculated as net earnings divided by the number of shares outstanding, which is $700,000 / 200,000 = $3.50. For diluted EPS, the stock options are considered. The options are "in the money" since the exercise price ($15) is less than the market price ($20). The treasury stock method is used to calculate the additional shares: 20,000 options * ($20 - $15) / $20 = 5,000 additional shares. Thus, diluted EPS is $700,000 / (200,000 + 5,000) = $3.41.