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Basic Question 28 of 40
Assume that the exercise price of an option is $10 and the average market price of the stock is $13. Assuming 999 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the diluted EPS?
B. 206
C. 231
A. 768
B. 206
C. 231
User Contributed Comments 14
| User | Comment |
|---|---|
| kalps | 999-[(10 * 999)/13] |
| blumonster | don't understand. shldn't it be just 768? |
| Gina | no, we are looking for the difference, not the proportion, ie 10 : 13 = 768 : 999. alternatively, you could have calculated (999*3)/13=231 |
| katybo | (13-10) / 13 * 999 = 231 |
| mchu | treasury stock method.. |
| epizi | Easy!option exercise you have 768 stocks in the markets at current price.So the firm has to add additional 231 stocks to satisfy the option holders. |
| MattyBo | Read carefully. Question is for added shares. |
| Kogelet | Treasury stock method http://www.fool.com/research/2000/features001012.htm |
| gazelle | There is a quick way to calculate it: Nx[(AMP-EP)/AMP] where: AMP= Average market price over the year EP= exercise price of the options or warrants N= # of common shares that the options & warrants can be converted into. |
| cslau83 | 999* 10 = 9990 <--This is money being raised from the exercise of options by holders. 9990/13 = 768 <---- this is the number of shares company can buy back form the money raised from the exercise. 999-768 = 231 <--- net increase in stock after buyback. |
| Saxonomy | 999 options @ $10 strike price = $9990 Option holders' purchasing power. --Let's get the spending-- (*A*) $9990/$13 = 768 shares Number of shares option holders will have if they bought shares at market price. (*B*) $9990/$10 = 999 shares Number of shares option holders will have if they bought shares at exercise price. EPS already reflects purchasing at market price (everyday stock market activity). But purchasing at the $10 discount enables the option holder to purchase more shares @ $10/share. These additional shares that all 999 option holders will now own is (*B*) minus (*A*). |
| Saxonomy | I'm not that smart, by the way. Writing this out helps me understand it. |
| jonan203 | nice example saxonomy! |
| birdperson | basically, as i see it, the option holders are entitled to 999 shares of stock. with the $10 exercise price and $13 market price the firm can but 768 shares with the proceeds of the options being exercised. to make the option holders whole, the firm has to issue the remaining shares (231) using treasury stock |
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Learning Outcome Statements
describe how earnings per share is calculated and calculate and interpret a company's basic and diluted earnings per share for companies with simple and complex capital structures including those with antidilutive securities
CFA® 2024 Level I Curriculum, Volume 2, Module 2.