- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 18. Understanding Income Statements
- Subject 5. Earnings per Share

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**CFA Practice Question**

A company has 50,000 stock options outstanding at year-end, each convertible into a share of common stock. The exercise price is $30 and the average price of the stock for the year has been $40. The effect on the calculation of diluted earnings per share would be to ______

A. add $1,500,000 to the numerator and add 50,000 shares to the denominator.

B. leave the numerator unchanged and add 37,500 shares to the denominator.

C. leave the numerator unchanged and add 12,500 shares to the denominator.

**Explanation:**There is no effect on the numerator, since the cash received from the exercise of the options is not income. The denominator increases by 12,500 based on the treasury method. The method assumes the company would repurchase as many shares as possible with the proceeds from the exercise. Therefore, 50,000 X $30 = $1,500,000/40 = 37,500. Since they could repurchase 37,500 at the average stock price, there would be 12,500 shares still outstanding.

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**User Contributed Comments**
1

User |
Comment |
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Anna_u |
Why not 37 500? |