Final answer:
The number of shares to be used in computing diluted earnings per share for 2011 is 672,000.
Step-by-step explanation:
The number of shares to be used in computing diluted earnings per share for 2011 is 672,000.
To compute diluted earnings per share, we need to consider the potential impact of stock options on the number of outstanding shares. In this case, Stine Inc. had stock options outstanding that allow the holders to purchase 90,000 shares of common stock at $28 per share. Since the average market price of Stine's common stock was $35 during 2011, these stock options would be considered dilutive as the market price is higher than the exercise price.
To calculate the number of shares to be used in computing diluted earnings per share, we add the number of shares issued for cash to the weighted average number of shares outstanding, considering the dilution effect of the stock options. The calculation would be as follows:
Weighted average number of shares outstanding = (300,000 shares × 12 months) + (300,000 shares × 6 months)
Number of diluted shares = Weighted average number of shares outstanding + Number of shares from stock options
Number of diluted shares = (300,000 × 12) + (300,000 × 6) + 90,000 = 3,600,000 + 1,800,000 + 90,000 = 5,490,000