Colselo has 200,000 common shares outstanding for the year and net income of $500,000. It has issued options to acquire 10,000 shares of common stock and has 20,000 shares of $100, 6% cumulative nonconvertible preferred stock, both of which were outstanding for the entire year. The exercise price for the options is $20 per share and the average market price during the year is $15 per share. Compute basic and diluted EPS.

Question

Quizplus · Accepted Answer

Basic EPS is calculated as (Net Income - Preferred Dividends) / Weighted Average Shares. Preferred dividends are $120,000 (20,000 shares * $100 * 6%). Basic EPS = ($500,000 - $120,000) / 200,000 = $1.90. The options are not dilutive because the exercise price ($20) is higher than the market price ($15), so diluted EPS is the same as basic EPS, $1.90.

Colselo Has 200,000 Common Shares Outstanding for the Year and Net