(EPS with Warrants) Worth Corporation earned $260,000 during a period

QUESTION

(EPS with Warrants) Worth Corporation earned $260,000 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 $15 per share during the period. Also outstanding were 30,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrant exercised.(a) Are the warrants dilutive?(b) Compute basic earnings per share.(c) Compute diluted earnings per share.
Solution: Net income during the period = $260,000 Average no. of shares outstanding = 100,000 Average market price per share = $15 No .of warrants = 30,000 Exercise price = $10 (a) Are the warrants dilutive: Yes, the warrants are dilutive. Since exercise price is lower than the current market price, rhe warrant holders will use the warrant to exercise and buy the shares. (b) Compute basic earnings per share. Basic earnings per share = Net income during the period / Average no. of shares outstanding (pre-dilution) Basic earnings per share = 260,000 / 100,000 = $2.60 (c) Compute diluted earnings per share. Diluted¦

gs per share = Diluted Net income during the period / Average no. of shares outstanding (post-dilution) Diluted Net income during the period = 260,000 (There is no impact as the dilution is happening through warrants and not interest-bearing instruments such as bonds or debentures). Average no. of shares outstanding (post-dilution) = 100,000 + 30,000 = 130,000 Diluted earnings per share = 260,000 / 130,000 = $2.00

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