The 2014 net income of MNO was $300,000, and 100,000 of its common shares were outstanding during the entire year.In addition, outstanding options existed to purchase 10,000 common shares at $10 per share.These options were granted in 2012 and none had been exercised by December 31, 2014.MNO earned interest at 8% and had a 50% tax rate.The amount, which should be shown as MNO's diluted earnings per share for 2014, is (rounded to the nearest cent).

Question

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To calculate diluted earnings per share (EPS), we must consider the effect of the options. The options allow for the purchase of 10,000 shares at $10 each, totaling $100,000. This money, if used by the company, would earn interest at 8%, or $8,000 annually. However, because of the 50% tax rate, the net increase in earnings would be $4,000 ($8,000 * 50%). Adding this to the net income gives $304,000 ($300,000 + $4,000). Dividing this by the total shares if the options are exercised (100,000 original shares + 10,000 from options = 110,000 shares) gives a diluted EPS of $2.76 ($304,000 / 110,000).

The 2014 Net Income of MNO Was $300,000, and 100,000