McManus Inc.reported net earnings of $400,000 for the year.McManus has 200,000 shares of common stock outstanding all year.On March 31,the company granted 40,000 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 $400,000 / 200,000 = $2.00. For diluted EPS, the stock options are considered. The options are "in the money" since the exercise price ($15) is less than the average market price ($20). The treasury stock method is used to calculate the additional shares: 40,000 options * ($20 - $15) / $20 = 10,000 additional shares. Thus, diluted EPS is $400,000 / (200,000 + 10,000) = $1.93.