Question

Stanley Department Stores reported net income of $815,000 for the year ended December 31, 2018.

Additional Information:

Common shares outstanding at Jan. 1, 2018	105,000
Incentive stock options (vested in 2017) outstanding throughout 2018	24,000
(Each option is exercisable for one common share at an exercise price of $24.50)
During the year, the market price of Stanley’s common stock averaged $29.4 per share.
On Aug. 30 Stanley sold 15,000 common shares.
Stanley’s only debt consisted of $39,000 of 10% short term bank notes.
The company’s income tax rate is 40%.

Required:

Compute Stanley’s basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in thousands.)

Answer 1

SOLUTION

1. Basic earnings per share

Details	Number of shares
Weighted average number of shares held on January 1	105,000
Weighted average number of shares sold on August 30 (15,000*4/12)	5,000
Total weighted average number of shares	110,000

Earnings per share = (Net income - Preferred dividends) / Weighted average number of shares

= (815,000 - 0) / 110,000

= $7.41 per share

2. Diluted earnings per share

Details	Number of shares
Weighted average number of shares held on January 1	105,000
Weighted average number of shares sold on August 30 (15,000*4/12)	5,000
Number of exercisable options granted as shares	24,000
Number of shares assumed reacquired as treasury stock (24,000*$24.50/$29.40)	(20,000)
Total weighted average number of shares	114,000

Earnings per share = (Net income - Preferred dividends) / Weighted average number of shares

= (815,000 - 0) / 114,000

= $7.15 per share