- CFA Exams
- CFA Exam: Level I 2021
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 7. Earnings per Share

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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?

B. $1.01

C. $0.98

A. $1.00

B. $1.01

C. $0.98

Correct Answer: C

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

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

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**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: 1,000,000<enter><enter> 100,000<enter> 10<times> 50<divide> 1,000,000<plus><divide> = .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 |