CFA Practice Question

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CFA Practice Question

The Widget Company had net income of $1 million for the period. There are 1 million shares of Widget common stock outstanding. If there are 100,000 options outstanding with an exercise price of $40, what is the diluted earnings per share for Widget common stock if the current price of a share is $50?

A. $1.00
B. $1.01
C. $0.98
Correct Answer: C

Use the treasury stock method:
Proceeds = 100,000 ($40) = $4,000,000
Shares assumed purchased with proceeds= $4,000,000/$50 = 80,000 shares
Potential dilution = 100,000 - 80,000 = 20,000 shares
Basic EPS = $1/share Diluted EPS = $1,000,000 / 1,020,000 = $0.98/share

User Contributed Comments 8

User Comment
katybo $10*100.000/$50 = 20.000
Done ($10*100,000)/$50 = $20,000. Add to denominator.
1,000,000/1,020,000 = $.9803
nayagan Looking at the choices, this question requires little math. Since strike is below AMP, you know diluted EPS < basic EPS. Assuming most of us are fairly intelligent, it should have been obvious that basic EPS was 1.00 (1mm/1mm), so answer must be less than 1.00!
Sam123456 Yeah 1 million dollars divided by 1 million shares and then knowing that the denominator will increase to take into account the dilution due to strike price < market price results in an EPS of less than $ 1/share.
jonan203 HP12C:
= .98
farhan92 used a denominator of 1,200,000 instead of 1,020,000
linzlinked what if they give both current price and year average price? Which one should be used to cal the added shares?
Rohule dilutive its less than basic so the only correct answer is c
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