An analyst is assigned to calculate diluted EPS for a company on the firm's watch list. He assembles the following notes before making the final calculations:
- The company has 1,000,000 shares of $100 par value, 5% preferred stock outstanding.
- The company has 100,000 warrants outstanding, each convertible into 100 common shares, with an exercise price of $10 per share. The average price of company stock during the year was $12 per share.
- The company reported net income of $20,000,000 or $1.50 Basic EPS on 10,000,000 Weighted Average # of Common Shares Outstanding.
Diluted Earnings per share (EPS) for the one year period is closest to:
Diluted EPS = Net Income - Preferred Dividends + NI Adjustments for Conversions / WACSO + Share adjustments for conversions
Share adjustment for exercise of warrants = ((Avg. Stock Price - Exercise Price) / Avg. Stock Price) x # of Exercised Shares
= (12 - 10)/12 x (100,000 x 100) = 1,666,667
= 20,000,000 - (1,000,000 x 100 x .05) / 10,000,000 + 1,666,667
1.29 < 1.50 so warrants are dilutive