Question

Sunland Company's net income for 2025 is $45,100. The only potentially dilutive securities outstanding were 1,300 options issued during 2024 , each exercisable for one share at $6. None has been exercised, and 10,400 shares of common were outstanding during 2025. The average market price of Sunland's stock during 2025 was $15.

a. Compute diluted earnings per share. (Round answer to 2 decimal places, e.g. 2.55.)
Diluted earnings per share $ ___
b. Assume the same facts as those assumed for part (a), except that the 1,300 options were issued on October 1,2025 (rather than in 2024). The average market price during the last 3 months of 2025 was $15. (Round answer to 2 decimal places, e.g. 2.55.)
Diluted earnings per share $ ___

Answer 1

To calculate the diluted earnings per share for Sunland Company, it is necessary to adjust the share count to account for the potential effect of options being exercised. The diluted EPS with options from 2024 is $4.13, and with options issued in October 2025, the diluted EPS is $4.29.

Step-by-step explanation:

To calculate the diluted earnings per share (EPS) for Sunland Company, we need to consider the impact of options. Diluted EPS includes the potentially dilutive effects of options and other securities that could be converted into common stock. When options are exercised, they increase the number of shares outstanding, which can potentially dilute the EPS.

Firstly, calculate the number of shares that could be purchased at the exercise price: 1,300 options × $6 = $7,800. Then, find out how many shares that amount could buy at the average market price: $7,800 ÷ $15/share = 520 shares. Since no options have been exercised, the adjusted weighted-average number of shares is 10,400 (original) + 520 (from options) = 10,920.

Now, compute the diluted EPS: $45,100 net income ÷ 10,920 shares = $4.13 diluted EPS. Therefore, the diluted EPS is $4.13.

For part (b), as the options were issued on October 1, 2025, they affect the EPS for only 3 months of the year. This means that the options are equivalent to 1,300 × (3/12) = 325 options for the entire year. Using the same calculation, the new amount of potentially purchased shares is $7,800 ÷ $15/share = 520 shares × (3/12) = 130 shares. The adjusted weighted-average number of shares becomes 10,400 + 130 = 10,530.

Finally, calculate the diluted EPS for part (b): $45,100 net income ÷ 10,530 shares = $4.29. The diluted EPS, in this case, is $4.29.