Question

A company has issued 100,000 options of which 50,000 are “in the money at an average exercise price of $15.00. The Company’s average stock price is $25.00 per share.

How many shares are dilutive and would affect the Company’s EPS calculation. Please show the calculation.

Answer 1

Solution:

As Stock price $25 is more than exercise price of $15, the options are dilutive

Proceeds from option issue = $15 * 50,000 = $750,000

Treasury shares purchased from proceeds of options ($750,000/$25) = 30,000 options

So dilutive no. of shares outstanding = 50,000 - 30,000 = 20,000

20,000 shares are dilutive and would affect the company's EPS calculation.

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