Question

Pearl Corporation earned $380,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of $18 per share during the period. Also outstanding were 14,700 warrants that could be exercised to purchase one share of common stock for $12 for each warrant exercised. (a) Are the warrants dilutive? (b) Compute basic earnings per share

Answer 1

Answer:

(i) Yes

(ii) $3.8

Explanation:

(a) Yes, warrants are dilutive because average market price of $18 is greater than the warrant price of $12.

(b) Net earnings = $380,000

Average number of shares = 100,000 shares of common stock outstanding

Basic earnings per share:

= Net earnings ÷ Average number of shares

= $380,000 ÷ 100,000

= $3.8

Therefore, basic earnings per share is $3.8.