Final answer:
The number of shares to be used in computing diluted earnings per share for Fugate Company is 1,305,000. This includes the original 750,000 shares, a weighted addition for the 750,000 shares issued mid-year, and the 180,000 shares resulting from the conversion of dilutive stock options.
Step-by-step explanation:
The number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2013, for Fugate Company can be calculated as follows:
- Basic shares outstanding at the beginning of the year: 750,000 shares.
- An additional 750,000 shares were issued on July 1, 2013, thus these additional shares would be weighted for 6 months of the year.
- The stock options would allow purchase of 225,000 shares at $20 when the average market price is $25. However, these options would only be converted if they are dilutive, meaning the exercise price is below the market price. In this case they are, so we calculate the number of shares that would be purchased with the money received from the options: (225,000 shares x $20) / $25 = 180,000 shares. These shares are to be included in the diluted EPS calculation.
The calculation for the weighted average number of shares for diluted EPS would be:
- 750,000 shares for the full year.
- Plus 375,000 shares for the additional shares issued on July 1 (750,000 shares x 6/12 months).
- Plus 180,000 shares from the options.
Therefore, the total number of shares for the diluted EPS calculation would be 750,000 + 375,000 + 180,000 = 1,305,000 shares.