Ace Company’s net income for the year is $4 million and the number of common shares outstanding is 3 million (there is no change in shares outstanding during the year). Ace has options and warrants outstanding to purchase 1 million common shares at $15 per share.

Required:

a. If the average market value of the common share is $20, year-end price is $25, interest rate on borrowings is 6%, and the tax rate is 50%, then compute both basic and diluted EPS.

b. Do the same computations as in a assuming net income for the year is only $3 million, the average market value per common share is $18, and year-end price is $20 per share.