Question

Primus, Inc., owns all outstanding stock of Sonston, Inc. For the current year, Primus reports net income (exclusive of any investment income) of $520,000. Primus has 50,000 shares of common stock outstanding. Sonston reports net income of $120,000 for the period with 40,000 shares of common stock outstanding. Sonston also has 10,000 stock warrants outstanding that allow the holder to acquire shares at $15.00 per share. The value of this stock was $30 per share throughout the year. Primus owns 5,900 of these warrants. What amount should Primus report for diluted earnings per share? (Round your intermediate percentage value to the nearest whole number and the final answer to 2 decimal places.) Diluted earnings per share

Answer 1

Primus, Inc.

Diluted earnings per share is:

= $14.51.

Step-by-step explanation:

a) Data and Calculations:

Primus, Inc. Sonston, Inc. Consolidated

Current net income $520,000 $120,000 $640,000

Outstanding common stock 40,000 40,000 40,000

Outstanding stock warrants 4,100 4,100

Total outstanding stock 44,100

Diluted earnings per share = Total current net income/Total outstanding stock

= $640,000/44,100

= $14.51

b) Diluted EPS is an important capital ratio for stockholders as it shows the earnings that a stockholder will be entitled to if convertible shares such as employee stock options, warrants, and debts are actually converted into common stock.