Terry Corporation had 480,000 shares of common stock outstanding at December 31, 2014. In addition, it had 90,000 stock options outstanding, which had been granted to certain executives, and which gave them the right to purchase shares of Terry's stock at an option price of $37 per share. The average market price of Terry's common stock for 2014 was $50. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2014?

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Quizplus · Accepted Answer

To compute diluted earnings per share, we need to consider the effect of stock options. The options are in-the-money since the market price ($50) is higher than the option price ($37). The treasury stock method is used to calculate the dilutive effect of the options. This method assumes that the options are exercised at the beginning of the period (or at the time of issuance if later), and that the company uses the proceeds from the exercise of options to buy back as many shares as possible at the average market price. The calculation is as follows:- Number of shares from option exercise = 90,000 options- Proceeds from the exercise = 90,000 options * $37 = $3,330,000- Number of shares repurchased = $3,330,000 / $50 = 66,600 shares- Net increase in shares = 90,000 - 66,600 = 23,400 sharesTherefore, the number of shares to be used in computing diluted EPS = 480,000 original shares + 23,400 additional shares = 503,400 shares.

Terry Corporation Had 480,000 Shares of Common Stock Outstanding at December