ExpertHard1 markMultiple Choice
CPA · Question 47 · Area I: Business Analysis
A company has 100,000 shares outstanding. Net Income is $200,000. It has 10,000 stock options outstanding with an exercise price of $15. The average market price of the stock is $20. What is the Diluted Earnings Per Share (EPS)?
A company has 100,000 shares outstanding. Net Income is $200,000. It has 10,000 stock options outstanding with an exercise price of $15. The average market price of the stock is $20. What is the Diluted Earnings Per Share (EPS)?
Answer options:
A.
$2.00
B.
$1.82
C.
$1.95
D.
$1.90
How to approach this question
Treasury Stock Method: 1. Assume exercise (Proceeds). 2. Buy back shares at Average Market Price. 3. Net incremental shares added to denominator.
Full Answer
C.$1.95✓ Correct
C
Incremental shares = Number of Options - [(Number of Options × Exercise Price) / Average Market Price]. 10,000 - [(10,000 × 15) / 20] = 10,000 - 7,500 = 2,500. Denominator = 100,000 + 2,500 = 102,500. Diluted EPS = $200,000 / 102,500 = $1.95.
Common mistakes
Adding full number of options to denominator; using ending market price instead of average.
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