Question

Frantic Fast Foods had earnings after taxes of $420,000 in 20X1 with 309,000 shares outstanding. On January 1, 20X2, the firm issued 20,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 30 percent.

a. Compute earnings per share for the year 20X1.

b. Compute earnings per share for the year 20X2.

Short answer

Earnings per share for the year

20X1: $1.36

20X2: $1.66

Step-by-step solution

Calculation of EPS for 20X1

$$\begin{gathered} \hspace{0.17em}EPS=\frac{Earningaftertax}{No.ofsharesouts\tan ding} \\ =\frac{\$420,000}{309,000} \\ =\$1.36 \end{gathered}$$

Calculation of EPS for 20X2

$$\begin{gathered} EPS=\frac{Earningaftertax\left(1+increaseinearning\right)}{No.ofsharesouts\tan ding+No.ofsharesissued} \\ =\frac{\$420,000\left(1+30\%\right)}{309,000+20,000} \\ =\$1.66 \end{gathered}$$