CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Assume that the exercise price of an option is $9 and the average market price of the stock is $12. Assuming 992 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the diluted EPS?
A. 248
B. 744
C. 992
Explanation: 992 * $9 = $8,928
$8,928/$12 = 744
992 - 744 = 248 new shares

User Contributed Comments 6

User Comment
dbadidas8 (992/12)*(12-9)=248
shiva5555 Can someone explain this please?
shiva5555 I get the 744 but then why do you subtract this from 992?
leftcoast 992 shares were issued and 744 were bought back. If you were to put both transactions in the denominator, you'd be left with 248 shares added, because 992-774=248.
assiduous In order for the company to provide shares to the persons exercising the options the company has to purchase the shares in the open market and/or issue additional shares. The company was able to raise $8928 in cash from the options exercise. Average market price per share is $12. How many shares can $8928 buy at $12 a share?
$8928/$12 = 744
Out of a total of 992 options the company would be able to buy 744 in the open market using the proceeds received from the options exercise. Net-Net the company would have to issue 248 additional shares in order to honor to total 992 options. Total shares outstanding increases by 248.
ongster Great explanation!
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