Question

At December 31, 2012, Destin Sports Equipment had 200,000 common shares issued and outstanding. On May 31, 2013, Destin issued a 15% stock dividend. Fully vested, incentive stock options issued in 2011 and exercisable for 40,000 shares (adjusted for the stock dividend) were outstanding at the end of 2013, with an exercise price of $40 per share. The market price of Destin’s common stock averaged $50 per share during 2013. Also outstanding since 2007 were $100,000 of 10% bonds issued at face value and convertible into 30,000 common shares. Destin’s tax rate is 40% and 2013 net income was $550,000.


__ 2. What is Destin’s 2013 basic earnings per share? b. $2.39


__ 3. What is Destin’s 2013 diluted earnings per share? a. $2.07

Answer 1

Answer:

2. Basic Earning per share = 2.39

3. Diluted earnings per share = 2.07

Explanation:

2.

Calculation of Weighted Average No. of Equity Shares Outstanding  

Particular     Portion        Shares         Calculations       Weighted

                    of year     outstanding                                  Average

                                     during time                                    Impact

                                        interval.  

Shares        12 months   200000        12/12*200000       200000

Outstanding

1 Jan-31 Dec

15% Stock     12 months     30000        12/12*30000         30000

                                                                  Total               230000

Basic Earning per share= Income available to common share

                                      holders/Weighted average no of shares

Net Income                                                           550000    

Income available to common share holders      550000    

Weighted Average no. of shares                        230000    

Basic Earning per share                                     = 2.39

3.

Diluted Earning Per Share =Earning for Equity share holders   after effects of  Dilutive Potential Equity Shares/ Weighted

Average No of O/SEquity after effects of Dilutive Potential Equity Shares

Potential Equity Shares=  ESOP-(ESOP*(Exercise Price/ Market Price))      

ESOP                                   40000        

Exercise Price                      40        

Market Price                        50        

Potential Equity Shares     8000

 Time        Portion          Shares          Calculations       Weighted

Interval      of year       outstanding                                Average

                                     during time                                  Impact

                                       interval

Shares    12 months      200000           12/12*200000     200000

Outstanding

1 Jan-31 Dec

15% Stock  12 months     30000            12/12*30000       30000   Dividend

Potential Equity                8000                                          8000  

Shares (ESOP)    

Debentures                      30000                                        30000  

                                                                    Total              268000

Diluted EPS        

Earning for Equity Share holders              550000      

Incremental EPS 100000*10%*(1-0.4)        6000      

Total                                                           556,000      

Weighted average no of Equity Shares  268000      

DEPS                                                          2.07