During 2021, Farewell Inc. had 504,000 shares of common stock and 52,000 shares of 5% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Farewell did not declare or pay any dividends during 2021. Farewell's net income for the year ended December 31, 2021, was $2.9 million. The income tax rate is 20%. Farewell granted 14,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $33 per share. The options vest after one year. The market price of the common stock averaged $34 per share during 2021. What is Farewell's diluted earnings per share for 2021, rounded to the nearest cent

Question

Business

Jakobe Leonard

17 October, 11:12

During 2021, Farewell Inc. had 504,000 shares of common stock and 52,000 shares of 5% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Farewell did not declare or pay any dividends during 2021. Farewell's net income for the year ended December 31, 2021, was $2.9 million. The income tax rate is 20%. Farewell granted 14,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $33 per share. The options vest after one year. The market price of the common stock averaged $34 per share during 2021. What is Farewell's diluted earnings per share for 2021, rounded to the nearest cent

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Answers (1)

Know the Answer?

Adam Walter · Answer 1

The correct answer is $5.15.

Explanation:

Preference Dividend = Shares * Par Value Of Per Share * Cumulative Rate%

= 52,000 * $100 * 5%

= $260,000

Common Shares Equivalent From Stock Option = 1 : Market Price Of Common Stock Average Per Share * Farewell Granted Stock On Jan. 1 * Right To Buy Share

= 1 : $34 * 14,000 * 20

= 8,235.29

Calculation Farewell Diluted Earning Per Share = Net Income - Preference Dividend : (Common Shares Equivalent From Stock Option+Common Shares)

=2,900,000-260,000 : ($8,235.29 + 504,000)

=2,640,000 : 512,235.29

= $5.15