Harvey Inc.reported net earnings of $500,000 for the year.Harvey has 200,000 shares of common stock outstanding all year.Two years ago the company granted 20,000 stock options that allow employees to purchase shares for $15 each.The company stock has averaged $20 in the market during the year.Compute the basic and diluted EPS.

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Quizplus · Accepted Answer

Basic EPS is calculated as net earnings divided by the number of shares outstanding, which is $500,000 / 200,000 = $2.50. For diluted EPS, the stock options are considered. The options are "in the money" since the exercise price ($15) is less than the market price ($20). The treasury stock method is used to calculate the effect of the options: 20,000 options x ($20-$15)/$20 = 5,000 shares. Thus, diluted shares = 200,000 + 5,000 = 205,000. Diluted EPS = $500,000 / 205,000 = $2.44.