An analyst gathered the following data about a company: • The company had 1 million shares ofcommon stock outstanding for the entire year. • The company’s beginning stock price was $50, its ending price was $70, and its average price is $60. • The company has 100,000 warrants outstanding for the entire year. • Each warrant allowed the holder to buy one share of common stock at $50 per share. How many shares ofcommon stock should the company use in computing its diluted earnings per share? A. 1,100,000. B. 1,028,571. C. 1,083,333. D. 1,016,667.
D 60-50/60 = .1667*100,000 = 16,667 + 1,000,000 Since no shares were issued or purchased throughout the year, no adjustment (ie 7/12* 1000 new shares) is needed. 60-50/60 = .1667 This is known as the treasury stock method.
could i trouble you for reasoning?
Don’t have my calculator in front of me, but use the Treasury Stock method. Multiply the 100,000 warrants by exercise price of $50. Divide this number by the average price of $60. This is the number of shares that the exercise of the warrants would allow the company to buy back. Subtract this number from 100,000 warrants and add the result to the 1,000,000 outstanding. The answer is D.
thanks heaps np. very helpful - didnt completely understand the t stock method…
Treasury stock method: Average Share Price - Exercise Price/Average share price. It is assuming that the company will need to honor the warrant exercise price by purchasing the stock out in the open market.
D? 1million + ((60-50)/60)*100,000) = 1,016,667
Note: avg share price > warrant = EXERCISE 100,000*50 = 5m 5m/60 = 83,333 shares can be purchased with proceeds 100,000 warrants - 83,333 = 16,667 (add to initial 1m) D!
Use the treasury stock method. {(Average Price- Excercise Price)/Average Price}*Warrants {(60-50)/60)}*100,000= 16,666.7 shares
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