Zachary Company’s warrants issued in 2000 are Zachary’s only outstanding potentially dilutive security. In 2005, EPS and Dilutive EPS differed for the first time. A possible explanation for the change is the: A) average market price of Zachary increased. B) year-end market price of Zachary increased. C) average market price of Zachary decreased. D) year-end market price of Zachary decreased. Please explain. Thanks.
A. If price increased it obviously means that warrants became worth something and were exercised.
I second A. The warrant exercise price must have fallen below the Average Market Price of the underlying stock.
would Dilutive EPS be greater than EPS ? Exercising warrants would have anti- dilutive effect ? Can you pls explain what would happen to that.
Dilutive EPS should always be less than Basic EPS…thats how you determine if warrants are dilutive or not…If AVG price is less than year end price, then EPS will be greater than Basic EPS and thus Anti-dilutive. We don’t exerice warrants if they are anti-dilutive as it will increase EPS.
A. B/c Avg. - Excerise>0 or no exercise