Are options always considered in the computation of diluted EPS irrespective of whether they get exercised during the year? Is it only under treasury method or always? I think for the scope of exam we just have to deal with treasury method. right?
There are three methods listed in the CFA material - the if-converted method for preferred, the treasury stock method for options, warrants, etc., and the method for convertible debt. Assume a company that has both preferred and options. My understanding is that you would get to DEPS using a combination of both the if-converted method and the treasury stock method. For the exam, you need to know all three methods.
surely if they had been exercised, they would be in basic EPS? because the shares would have been issued?
Kiakaha Wrote: ------------------------------------------------------- > surely if they had been exercised, they would be > in basic EPS? because the shares would have been > issued? Yes they had been…I am talking about if they are not excised, are they considered in diluted EPS calculation? seems like you always consider whether they are exercised or not.
yes, i noticed it too…actually i think usually the context of the question helps you get that you have to apply the treasury method…however, i think the only thing is to make sure before that the stock from these options are really dilutive i.e their exercise price < avg market price over the year. Because if they are anti-dilutive, you have to exclude them
I don’t know how you get the context from the question. In fact, the question I am talking about clearly mentioned that the options were not exercised during the year, and treasury method was not mentioned at all. I looked at the question few time again but no luck, no trick. Of course, you have to look if they are dilutive or not.
If my memory is good (someone to confirm ?) actually if they specify that options were not exercised, then you have to include them in your dilutive EPS calculation. The calculation of the dilutive EPS aim to point out the effect convertible securities will have in our EPS if they were exercised as of today. That why the avg market price is used as the price of the underlying, and also why the net increase is calculated since these new stocks will be issued based on a lower market price. Im too lazy to check it, have to go to bed now, be a CFA candidate and work at the same time is definitely very tiring, a No-Life land, lol
Options are always dilutive if exercised. think about the EPS formula, they don’t affect the numerator and they make the denominator bigger. if the average market price during the year is higher than the exercise price, you assume they’ve been exercised and adjust the number of shares outstanding (using the treasury stock method).
My understanding is that for warrants and options which won’t b exercised u just ignore them
Yes, Kiakaha is right, if the average market price during the year is higher than the exercise price, you assume they’ve been exercised Kiakaha Wrote: ------------------------------------------------------- > Options are always dilutive if exercised. think > about the EPS formula, they don’t affect the > numerator and they make the denominator bigger. > > if the average market price during the year is > higher than the exercise price, you assume they’ve > been exercised and adjust the number of shares > outstanding (using the treasury stock method).
Options aren’t dilutive if earnings are negative.
JoeyDVivre Wrote: ------------------------------------------------------- > Options aren’t dilutive if earnings are negative. Where did you get this one from? Did you see questions based on this? When you say earnings are negative? – Are you talking about net income or operating income? Do you even calculate EPS if earnings are negative? If yes, would EPS be negative in that case?