Session 8: Financial Reporting and Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement Reading 32: Understanding the Income Statement
LOS h: Differentiate between dilutive and antidilutive securities, and discuss the implications of each for the earnings per share calculation.
Moulding Company’s net income was $13,820,000 with 2,600,000 shares outstanding. The average share price for the year was $58.00. Moulding had 10,000 options to purchase 10 shares each at $40 per share outstanding the entire year. Moulding Company’s diluted earnings per share are closest to:
Moulding’s basic EPS (net income / weighted average common shares outstanding) was $13,820,000 / 2,600,000 = $5.32.
Using the treasury stock method to compute diluted EPS, if the options were exercised, cash inflow would be 10,000 × 10 × $40 = $4,000,000. Based on the average share price of $58.00, the number of Moulding shares that can be purchased with the cash flow is $4,000,000 / $58 = 68,966. The number of shares that would have been created is 100,000 – 68,966 = 31,034. Diluted EPS was $13,820,000 / (2,600,000 + 31,034) = $5.25. |