Question

Kasravi Co. had net income for 2011 of $300,000. The average number of shares outstanding for the period was 200,000 shares. The average number of shares under outstanding options, at an option price of $30 per share is 12,000 shares. The average market price of the common stock during the year was $36. What should Kasravi Co. report for diluted earnings per share for the year ended 2011?

a. $1.50
b. $1.49
c. $1.43
d. $1.42

Answer 1

To calculate diluted earnings per share, add the potential dilution from outstanding options to the net income and divide by the sum of average shares outstanding and the potential dilution.

Step-by-step explanation:

To calculate diluted earnings per share, we need to consider the potential dilution from outstanding options. In this case, there are 12,000 shares under outstanding options at an option price of $30 per share. The average market price of the common stock during the year was $36. Diluted earnings per share is calculated by adding the potential dilution from outstanding options to the net income and then dividing by the sum of average shares outstanding and the potential dilution.

Net Income + Potential Dilution / (Average Shares Outstanding + Potential Dilution)

For this calculation: 300,000 + (12,000 * (36 - 30)) / (200,000 + 12,000) = $1.42. Therefore, Kasravi Co. should report diluted earnings per share of $1.42 for the year ended 2011.