Question

Burnet Company had 30,000 shares of common stock outstanding on January 1, 2011. On April 1, 2011, the company issued 15,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock was $9. The company reported net income in the amount of $189,374 for 2011.

What is the effect of the options?

A. The options will dilute EPS by $.33 per share.
B. The options will dilute EPS by $.09 per share.
C. The options are anti-dilutive.
D. The options will dilute EPS by $.17 per share.

Answer 1

The options will dilute EPS by $0.50 per share. (Non of the suggested options)

Step-by-step explanation:

Earnings per Share is the Earning attributable to Shareholders of Common Stock

To Determine the Dilutive effect of the Option to following should be considered :

Step 1 ; Calculate Basic Earning Per Share

Basic Earning Per Share = Net Income Attributable to Shareholders of Common Stock/Weighted Average Number of Common Stock

= $189,374/(30,000+9/12×15,000)

= $4,59

Step 2 : Calculate Diluted Earnings Per Share

Diluted Earnings Per Share = Adjusted Earnings / Adjusted Common Stocks

= $189,374/(30000+9/12×15,000+5,000)

=$4,09

Comparison of Basic Earning Per Share and Diluted Earnings Per Share will reflect the effect of the Options on Earnings per Share.