CFA Level I · CFA Level I Exam · Analyzing Income Statements
An analyst notes that a company's outstanding options have an exercise price above the average market price for the year. In computing diluted EPS under the treasury stock method, these options are most likely:
The options are treated as antidilutive and excluded from diluted EPS. When the exercise price exceeds the average market price, the assumed buyback would exceed the shares issued, which would increase EPS rather than reduce it.
- Atreated as antidilutive and excludedCorrect
- Bincluded with the shares added at the exercise price
- Cincluded because all options reduce EPS
Explanation
Out-of-the-money options would repurchase more shares than are issued, which would raise EPS. They are antidilutive and are excluded from diluted EPS.
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