Question

Ivanhoe Limited purchased 50,000 call options during the year. The options give the company the right...

Ivanhoe Limited purchased 50,000 call options during the year. The options give the company the right to buy its own common shares for $7 each. The average market price during the year was $10 per share. Assume that Ivanhoe also wrote put options that allow the holder to sell 50,000 of Ivanhoe’s shares to Ivanhoe at $11 per share.

Calculate the incremental shares outstanding for Ivanhoe Limited.

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Answer #1

Long call Option Strike price given is = $7

Long Call Option excercised = 50,000

Note* Average market price during the year > long call option strike price therefore long call option will be excercised

Short call option strike price is = $11

Average market price = $10

Note* In this situation Average market price is < short call option therefore no short call option is excercised.

Incremental shares outstanding = Long call option Excercised - Short call Excercised

= 50,000 - 0 = 50,000

Therefore, incremental shares outstanding of crane limited are 50,000

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