CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Which of the following statements regarding the treasury stock method of computing outstanding shares is FALSE? The treasury stock method ______
A. is used when the exercise price of the option is less than the average market price.
B. assumes that the hypothetical funds received by the company from the exercise of the options are used to sell shares of the company's common stock in the market at the average market price.
C. reduces the total number of shares created by the hypothetical exercise of the options into common stock.
Explanation: The treasury stock method is used to determine the impact of dilutive warrants and options on earnings per share. It assumes that the hypothetical funds received by the company from the exercise of the options are used to purchase shares (not sell shares) of the company's common stock in the market at the average market price.

User Contributed Comments 8

User Comment
chenyx It is purchase rather than sell shares.
yanpz I thought C is incorrect too, it increases the number of shares, not reduces.
wollogo No it does reduce the number shares because the proceeds of the option/warrant excercise are used to purchase shares in the market rather than issue new shares. Thus less new shares are created.
viviennemao exercising options will increase the # of shares outstanding, but buy-back from the company will reduce this number.

The net effect is an increase in # of shares outstanding.
cong Treasury method is used when the market price of shares is greater than the option exercise prices of shares.
cfastudypl The reduction of the shares comes from issuing shares using the book value and issue shares using market values. For example, if you were to issue 1000 shares of company A whose nominal share value is $1 and market value is $10, using the nominal value you would issue 1,000 shares but using the market value you would only need to buy 100 shares. You can see that the treasury stock is actually reduced by 900 (1,000 - 100).
cfastudypl That is, new shares created reduced by 900.
nmech1984 FALSE.......sh...
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