Baltimore’s basic earnings per share (EPS) (net income / weighted average shares outstanding) for 2004 was $4,200,000 / 750,000 = $5.60.
To calculate diluted EPS, we use the treasury stock method to account for the warrants:
- Number of common shares created if options are exercised = 10,000 × 10 = 100,000
- Cash inflow if warrants are exercised = $40 × 100,000 = $4,000,000
- Shares purchased with these funds = $4,000,000 / 50 = 80,000
- Net increase in shares outstanding = 100,000 – 80,000 = 20,000
Diluted EPS = $4,200,000 / (750,000 + 20,000) = $5.45.
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