FED had 100 common shares issued and outstanding at December 31,2013.On July 1,2014,FED issued a 10 percent stock dividend.Unexercised stock options to purchase 20 common shares (adjusted for 2014 stock dividend)at $20 per share were outstanding at the beginning and end of 2014.The average market price of FED'S common shares (which was not affected by the stock dividend)was $25 per share during 2014.The ending market price was $40.FED earned interest at 8% and had a 50% tax rate.Net income for the year ended December 31,2014,was $2,200.What was FED'S 2014 diluted earnings per share,rounded to the nearest cent?

Question

Quizplus · Accepted Answer

The diluted EPS is calculated by adjusting the net income for the effect of stock options. The stock options are in-the-money since the exercise price ($20) is less than the average market price ($25). The additional shares from the options are 20, adjusted for the stock dividend (20 * 1.1 = 22). The proceeds from the exercise of options ($20 * 22 = $440) would buy 17.6 shares at the average market price ($440 / $25). Thus, the net increase in shares is 22 - 17.6 = 4.4 shares. The weighted average shares outstanding after the stock dividend is 110. The diluted EPS is $2,200 / (110 + 4.4) = $17.05.

FED Had 100 Common Shares Issued and Outstanding at December