Question

Sage Corporation reported net income of $231,840 in 2020 and had 186,000 shares of common stock outstanding throughout the year. Also outstanding all year were 58,500 options to purchase common stock at $11 per share. The average market price of the stock during the year was $15. Compute diluted earnings per share. (Round answer to 2 decimal places, e.g. 3.55.) Diluted earnings per share $ Pearl Corporation reported net income of $213,860 in 2020 and had 53,900 shares of common stock outstanding throughout the year. Also outstanding all year were 4,500 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of $5 per share. Pearl's tax rate is 50%. Compute Pearl's 2020 diluted earnings per share. (Round answer to 2 decimal places, e.g. 3.55.) Diluted earnings per share $

Answer 1

Answer:

Sage Corporation

Computation of the diluted earnings per share:

Amount towards stock options at exercise price of $11 = 58500 shares x $11 = $643500

Value of options at current market price =58500 shares x $15 = $877500

Value in current share = $877500 - $643500 = $234000

Diluted shares = ($234000/$877500) x 58500 shares = 15600 shares

Outstanding shares = 186000

Net income = $231840

Diluted earnings per share = (total income – preference dividends)/outstanding shares + diluted shares

Since, no information about preference shares is provided, no preference dividends exists.

Hence, diluted earnings per share = ($231840)/ (186000 + 15600) = $1.15

Diluted earnings per share = $1.15

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Diluted Earnings per share is computed as:

Diluted EPS=Net income/(Weighted average number of shares adjusted for dilutive shares

= 213860 / (common stock+(Number of preferred shares x conversion rate))
=213860 / (53900 shares + (4500 shares x 2 shares))
=213860 / (53900 shares + 9000 shares)
=213860 / 62900 shares
=$3.4

Diluted earnings per share is $3.4