I thought that 999 options gives me right to purchase 999 shares at $10. Can someone please explain this calculation? Looks like an easy one but I can’t simply get this. Assume that the exercise price of an option is $10, and the average market price of the stock is $13. Assuming 999 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the diluted earnings per share (EPS)? A) 999. B) 768. C) 206. D) 231. Your answer: A was incorrect. The correct answer was D) 231. (999)(10) = 9,990 9,990 / 13 = 768 999 − 768 = 231
I guess we will find out what that copyight policy means…
I dint get the humor Joey!
It’s not humor - that question is certainly Schweser copyrighted material. Read the new copyright policy.
There is $3 of dilution created by each option. There are 999 options, so there is $2997 worth of dilution created by the options. With the current share price at $13, there are approximately 231 dilutive shares created because of them ($2997/$13). This is why options that are out of the money are not dilutive because if an option was priced @ $10 and the current stock price is $8, they create no additional shares.
Think of it this way, if the 999 options are exercised @ $10, the company has to give the option holders 999 shares of stock. The company can take the $9,990 received from the exercise and buy 768 shares @ $13 in the open market. They will have to 231 issue new shares to make up for the shortfall.