Can someone explain me, I can`t understand this questions, I need a step by step:

For its fiscal year- end, Calvan Water Corporation (CWC) reported net income of $12 million and a weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of $20. CWC’s market price over the year averaged $25 per share. CWC’s diluted EPS is closest to:

Well Net Income according to the book formula (https://gyazo.com/aa84ec4c7eeda3c9732a199c3382852e) would be the numerator, the denominator would be more or less $2.000.000 (I got confused with this option stuff)

The denominator isn’t dollars; it’s a number of shares. And whether it’s more or less than 2,000,000 is really, really important; it’s the whole point of this question.

You have to assume that the options are exercised, and that any money generated is used to buy back shares. This is known as the Treasury Stock method.

By the way, you’d better calculate basic EPS as well, if the diluted EPS is bigger than basic EPS, you should use basic EPS instead of Diluted EPS,in this question, the basic EPS is 5.6, so use 5.54 as diluted EPS is correct.

Also, be careful when the basic EPS is negative: the rules for when a security is dilutive and when it is antidilutive are reversed: a smaller negative EPS is antidilutive whereas a smaller positive EPS is dilutive.