16-26Coronado Company’s net income for 2020 is $51,000. The only potentially dilutive securities outstanding were 1,200 options issued during 2019, each exercisable for one share at $6. None has been exercised, and 9,000 shares of common were outstanding during 2020. The average market price of Coronado’s stock during 2020 was $15.(a) Compute diluted earnings per share.

The diluted earnings per share is $5.25

Explanation:

In this question, we are asked to compute the diluted earnings per share.

To calculate this, we employ the mathematical formula below for diluted earnings per share:

Diluted earnings per share

= (Total income - preference dividends) /( outstanding shares + diluted shares)

To be able to use this formula, we need a formula expression to get the value of the diluted shares.

Diluted shares = Options issued - value of options

Also,

Amount paid towards shares = Options issued * Exercise price per share = 1,200 * 6 = $ 7,200

Value of options = Amount paid towards shares / Current market price = $ 7,200 /$ 15= 480

Hence, diluted shares = 1,200 - 480 = 720

Thus, the diluted earnings per share =

( 51,000) / ( 9,000 +720) = $5.25 per share

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