Kasravi Co. had net income for 2015 of $500,000. The average number of shares outstanding for the period was 200,000 shares. The average number of shares under outstanding options, at an option price of $30 per share is 12,000 shares. The average market price of the common stock during the year was $36. What should Kasravi Co. report for diluted earnings per share for the year ended 2015?

Question

Quizplus · Accepted Answer

To calculate diluted earnings per share (EPS), we first need to adjust for the potential shares that could be issued under the options. The treasury stock method is used for options, which assumes that the company uses the proceeds from the exercise of options to buy back shares at the average market price. The calculation is as follows:1. Calculate the proceeds from the exercise of options: 12,000 shares * $30 = $360,000.2. Calculate how many shares could be bought back with these proceeds at the average market price: $360,000 / $36 = 10,000 shares.3. Net increase in shares from the exercise of options: 12,000 (from exercise) - 10,000 (bought back) = 2,000 shares.4. Adjusted average number of shares: 200,000 (original) + 2,000 (additional from options) = 202,000 shares.5. Calculate diluted EPS: $500,000 net income / 202,000 shares = $2.4752, which rounds to $2.48.