The 2014 net income of Beguile Inc.was $200,000 and 100,000 shares of its common stock were outstanding during the entire year.In addition,there were outstanding options to purchase 10,000 shares of common stock at $10 per share.These options were granted in 2011 and none had been exercised by December 31,2014.Market prices of Beguile's common stock during 2014 were

The amount that should be shown as Beguile's diluted earnings per share for 2014 (rounded to the nearest cent)is

Question

The 2014 net income of Beguile Inc.was $200,000 and 100,000 shares of its common stock were outstanding during the entire year.In addition,there were outstanding options to purchase 10,000 shares of common stock at $10 per share.These options were granted in 2011 and none had been exercised by December 31,2014.Market prices of Beguile's common stock during 2014 were

The amount that should be shown as Beguile's diluted earnings per share for 2014 (rounded to the nearest cent) is

The amount that should be shown as Beguile's diluted earnings per share for 2014 (rounded to the nearest cent)is

Quizplus · Accepted Answer

To calculate diluted earnings per share, we need to add the potential dilution from stock options to the weighted average number of shares outstanding. The calculation is as follows:

Net Income / (Weighted Average Shares Outstanding + Diluted Shares Outstanding)
$200,000 / (100,000 + (10,000 * ($20 - $10))) = $200,000 / (100,000 + 100,000) = $200,000 / 200,000 = $1 per share

The potential dilution from the options is 10,000 shares, which would be purchased at $10 per share, but can be sold at $20 per share. Therefore, each option would create $10 of potential dilution. The market price of Beguile's common stock was $20 per share for 2014.

The diluted earnings per share is $1, which is lower than the basic earnings per share of $2. Therefore, the potential dilution from the options does have an impact on the diluted earnings per share.

The closest answer choice to $1 is C) $1.89, rounded to the nearest cent.

The 2014 Net Income of Beguile Inc