Question

Mann, Inc., had 300,000 shares of common stock issued and outstanding at January 1. On July 1, an additional 50,000 shares of common stock were issued for cash. Mann also had unexercised stock options to purchase 40,000 shares of common stock at $15 per share outstanding at the beginning and end of the year. The average market price of Mann’s common stock was $20 during the year. If net income is $455,000, what will Mann report as diluted earnings per share (DEPS) for the year ended December 31?

Answer 1

Solution:

* Applying the treasury stock method, Mann Inc. would receive $ 600,000 (40,000 shares X $15 per share) in exercise proceeds, calculated as 40,000 stock options with the average exercise price of $15, which it can use to repurchase 30,000 common shares on the open market at the average stock price of $20.

The additional 10,000 (40,000 - 30,000) shares, which is the difference between 40,000 assumed issued shares and 30,000 assumed repurchased shares, represent the net new shares issued as a result of the potential stock options. Hence, 10,000 shares are diluted.