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For the fiscal year-end, CWC reported net income of $12 million and weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price at $20. CWC's market price over the year averaged $25 per share. CWC's diluted EPS is close to: (Assume the preferred shares are not convertible.)

A. $5.60.
B. $5.38.
C. $6.00.
D. $5.54.

User N Raghu
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1 Answer

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Final answer:

The diluted EPS for CWC is calculated by adjusting the weighted average shares outstanding for the in-the-money options and then dividing the net income available to common shareholders by this new share count. After accounting for the stock options, the diluted EPS is approximately $5.38 per share.

Step-by-step explanation:

To calculate the diluted earnings per share (EPS) for CWC at fiscal year-end, we need to adjust the number of common shares outstanding for the effects of stock options. The company reported a net income of $12 million and has to pay out $800,000 in preferred dividends, making the amount available to common shareholders $11.2 million. It also had 2,000,000 common shares outstanding and 100,000 options that could potentially be exercised and converted into common stock.

Since the current market price is $25 and the exercise price of the options is $20, the options are in-the-money. The calculation for the number of shares that would be purchased at the exercise price is: $20 * 100,000 = $2 million. The actual amount received from these options being exercised would be $2 million, which when added to the market cap, allows the purchase of 80,000 new shares at $25 per share (since $2,000,000/$25 = 80,000 shares).

Now, we adjust the weighted average of common shares outstanding to include these additional shares: 2,000,000 (existing shares) + 80,000 (new shares from option exercise) = 2,080,000 shares. Finally, we divide the adjusted net income available to common shareholders by the adjusted weighted average shares to find the diluted EPS: $11.2 million / 2,080,000 shares = approximately $5.38 per share.

Therefore, the diluted EPS for CWC is close to option B: $5.38.

User Kousher Alam
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