CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

An analyst gathers the following information about a company:

Average market price per share of common stock during the year: $40
Exercise price per share for options on 50,000 common shares: $50
Exercise price per share for warrants on 20,000 common shares: $30

Using the treasury stock method, the number of incremental shares used to compute diluted earnings per share is closest to ______.
A. 2,000
B. 5,000
C. 15,000
Explanation: Diluted EPS is calculated using the treasury stock method, which considers what the effect would be if the options or warrants had been exercised. Only options or warrants that are in-the-money are included, as out-of-the-money options would not be exercised. Therefore only the warrants are dilutive: their exercise price is below the average market price of the stock. Using the treasury stock method, the number of new shares issued on exercise is reduced by the number of shares that could be purchased with the cash received upon exercise of the warrants: 20,000($30) = $600,000 in proceeds. $600,000 / $40 = 15,000 shares treasury stock. Incremental shares using the treasury stock method = 20,000 - 15,000 = 5,000.

User Contributed Comments 1

User Comment
drods91 Very nice question. You must always consider if the options/warrants are in or out of the money before including them.
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