CFA Level I · CFA Level I Exam · Analyzing Income Statements
A company has net income of 12,000,000 and 5,000,000 weighted average ordinary shares. It has 1,000,000 options with an exercise price of 30 when the average market price is 40. Using the treasury stock method, diluted EPS is closest to:
Diluted EPS is about 2.29. The options raise 30 million, repurchasing 750,000 shares at 40, so 250,000 incremental shares are added to 5,000,000, and 12,000,000 divided by 5,250,000 gives roughly 2.29.
- A2.23
- B2.29Correct
- C2.40
Explanation
Proceeds = 1,000,000 x 30 = 30,000,000, buying back 750,000 shares at 40. Incremental shares = 250,000. Diluted shares = 5,250,000. Diluted EPS = 12,000,000 / 5,250,000 = 2.286, about 2.29. Basic EPS of 2.40 ignores dilution.
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