Termite Terminators has a debt-to-equity ratio of 50%. The equity consists of 80,000 common stock, valued at the year-end at 65. The preferred equity consists of
30,000 shares of par value 25 and coupon of 6%. The debt carries a coupon rate of 8%. During the year, Termite earned 1.2 million and had an average stock price of 75. It also has 40,000 warrants attached to the debt, each exercisable at 68. Termite's reported Diluted EPS should be:
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A. B. C. D.B
For Diluted EPS, the average price is used in the treasury stock method. Since the average price of 75 is more than the strike price of 68 of the warrants, the warrants are dilutive for DEPS calculations. The preferred dividend is 30,000*25*6% = 45,000. The additional shares using the treasury stock method equal
40,000 - 40,000*68/75 = 3,733. The DEPS then equals (1,200,000-45,000)/(80,000+3,733) = 13.79.