During 2018, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2018. Falwell's net income for the year ended December 31, 2018, was $2.5 million. The income tax rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2018.
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What is Falwell's diluted earnings per share for 2018, rounded to the nearest cent?

Question

Quizplus · Accepted Answer

The computation ($ in 000s) is as follows: 11ea937b_3599_7071_a419_933a9697a516_TB2599_00 *10,000 options × 20 shares/option = 200,000 shares;
Proceeds = 200,000 × $29 = $5,800,000
$5,800,000 ÷ $30 per share = 193,333 shares of treasury stock
Net shares added = 200,000 - 193,333 = 6,667