An analyst gathers the following data:
1,000,000 common shares outstanding (no change during the year)
＄6,500,000 net income
＄500,000 preferred dividends paid
＄600,000 common dividends paid
＄60 average market price of common stock for the year
100,000 warrants outstanding exercisable at ＄50
The company’s diluted earnings per share is closest to:
A ＄5.45
B ＄5.90
C ＄6.00
The answer’s B.
What answer did you get?
The answer is B.However,I can’t figure out how many share added in this question.
If the warrants were exercised, how much cash would the company receive?
Decrease 1M dollars for company
?
Let’s try this again: if the warrants are exercised (so that the people who exercise the warrants will pay the company $50 per share), how much money will the company receive?
Ok,I got your point.Now, Answer is 0.5m.
No, it’s not.
What’s $50 / share × 100,000 shares?
Thanks, I found the problematic node. I have a problem with the understanding of the treasury stock buy back. Therefore, the implementation of the warrants will also deduct the purchase of treasury stocks.,
Diluted EPS=(6.5m-0.5m)/[1m+0.1m(1-50/60)]
Cool.
So . . . how much money does the company get?
5m
And how many of the 100,000 shares will the company repurchase with that $5,000,000?
83333
So the net number of additional shares is?
16666
So there you have it: WACSO = 1,000,000 + 16,667 = 1,016,667 shares, and the numerator is $6,000,000 (= $6,500,000 − $500,000).