Question

During 2021, Farewell Inc. had 504,000 shares of common stock and 52,000 shares of 5% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Farewell did not declare or pay any dividends during 2021. Farewell's net income for the year ended December 31, 2021, was $2.9 million. The income tax rate is 20%. Farewell granted 14,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $33 per share. The options vest after one year. The market price of the common stock averaged $34 per share during 2021. What is Farewell's diluted earnings per share for 2021, rounded to the nearest cent

Answer 1

The correct answer is $5.15.

Step-by-step explanation:

Preference Dividend = Shares × Par Value Of Per Share × Cumulative Rate%

= 52,000 × $100 × 5%

= $260,000

Common Shares Equivalent From Stock Option = 1 ÷ Market Price Of Common Stock Average Per Share × Farewell Granted Stock On Jan.1 × Right To Buy Share

= 1 ÷ $34 × 14,000 × 20

= 8,235.29

Calculation Farewell Diluted Earning Per Share= Net Income - Preference Dividend ÷ (Common Shares Equivalent From Stock Option+Common Shares)

=2,900,000-260,000 ÷ ($8,235.29 + 504,000)

=2,640,000 ÷ 512,235.29

= $5.15