Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2018. On April 1, 2018, the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock for the year was $12. What number of shares of stock (rounded) should be used in computing diluted earnings per share?

$56,667

Explanation:

Diluted EPS is a measure used to assess the quality of a company's earnings per share (EPS). Diluted EPS takes into calculation all convertible securities such as convertible bonds or convertible preferred stock, which are changed into equity or common stock.

The stock options have a value of (10,000 × $10)/$12 = $8,333 on conversion.

To calculate the Diluted Earnings per share,

40,000 + (20,000 × 9/12) + (10,000 - 8,333) = $56,667.

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