Can someone kindly explain the question ? wondering on how to get the Weighted avg. no of shares :
Moulding Company’s net income was $13,820,000 with 2,600,000 shares outstanding. The average share price for the year was $58.00. Moulding had 10,000 options to purchase 10 shares each at $40 per share outstanding the entire year. Moulding Company’s diluted earnings per share are closest to:
A) $5.25. B) $3.71. C)
$5.32.
Thanks in advance ,
HedgeFudge
If the options were exercised, they’d issue 100,000 (= 10,000 × 10) shares and receive $4,000,000 (= 100,000 × $40). They’d then use that money to repurchase 68,966 (= $4,000,000 ÷ $58) shares, so the net increase in shares outstanding would be 31,034 (= 100,000 – 68,966). The diluted EPS would use 2,631,034 (= 2,600,000 + 31,034) shares:
$13,820,000 / 2,631,034 shares = $5.25/sh
Options would use the treasury stock method to compute diluted EPS.
Treasury stock method assumes you use the cash you receive upon exercise of the options to repurchase the shares in the open market. So you would reduce the number of shares exercised by the amount you assumed are repurchased. As the options were outstanding through the whole year the average price would be used to assume repurchase.