CFA Practice Question

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CFA Practice Question

Assume that the exercise price of an option is \$6 and the average market price of the stock is \$10. Assuming 802 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the diluted EPS?

A. 321
B. 481
C. 286

(802)(6) = 4812
4812/10 = 481.2
802-481 = 321

User Comment
tinku I guess exercise price is strike price. If it is, you get the stocks for the Strike price. So 802 options will be converted to stocks. Where does the 4812/10 come from?
LogicMan Yes the exercise price is strike price. 4812 is the option revenue when all 802 option holders exercise their options. That is they will buy 802 shares at \$6.
xxxx also agree with B. : if call price < current (average) price -> all options will be executed
cutehinano # of options * intrinsic value of each option / market price of stock = 802 * 4 / 10 = 321 shares
YOUCANDOIT So 802 shares are added when investors convert their warrants.

But the firm uses the funds they receive from the warrants to repurchase shares in the market
(802 warrants x \$6 conversion price)/\$10 mkt share price = 617 shares repurchased

802 shares added - 481 shares repurchased