Venzuela Company's net income for 2020 is $50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2019, each exercisable for one share at $6. None has been exercised, and 10,000 shares of common were outstanding during 2020. The average market price of Venzuela's stock during 2020 was $20. (a) Compute diluted earnings per share. (Round answer to 2 decimal places, e. g. $2.55.)

Answer explained below

Explanation:

GIVEN:

options issued = 1000

exercise per share = $6

market price = $20

net income = $50000

a) Diluted earnings per share

= (Total income - preference dividends) / (outstanding shares + diluted shares)

Amount paid towards shares = Options issued * Exercise price per share = 1,000 * 6 = $ 6,000

Value of options = Amount paid towards shares / Current market price = $ 6,000 / $ 20 = 300

Diluted shares = Options issued - value of options = 1000 - 300 = 700

So Diluted Earnings per share = (50,000) / (10,000 + 700) = $ 4.67 per share.

b) Calculation of diluted shares 700 (same as above)

Weighted average for the period holding i. e, 3 months = 700 * 3/12 = 175 shares increased during the period.

Diluted EPS = 50,000 / (10,000 + 175) = $ 4.91 per share