Final answer:
To compute diluted earnings per share, we need to consider the potential dilution from stock options. In this case, Terry Corporation had 300,000 shares of common stock outstanding and 90,000 stock options. The number of shares that should be used in computing diluted earnings per share is 323,400.
Step-by-step explanation:
To compute diluted earnings per share, we need to consider the potential dilution from stock options. In this case, Terry Corporation has 300,000 shares of common stock outstanding and 90,000 stock options. These stock options give certain executives the right to purchase shares at an option price of $37 per share. Since the average market price of Terry's common stock for 2010 was $50, the stock options would be considered dilutive since they are exercisable at a price lower than the market price.
To determine the number of shares to use in computing diluted earnings per share, we need to calculate the number of additional shares that would be issued if all stock options are exercised. This can be done by dividing the total value of stock options at the option price ($37) by the average market price of the common stock ($50). So, the number of additional shares is 90,000 x ($50 - $37) / $50 = 29,400.
To find the diluted weighted average number of shares, we add the additional shares to the original number of shares. So, the diluted weighted average number of shares is 300,000 + 29,400 = 329,400. Therefore, the correct answer is option d. 323,400.