Question

Warrants exercisable at $20 each to obtain 70000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by

Answer 1

Let us first understand the meaning of following terms to proceed with the solution -

Warrants - It gives a right to the holder to buy shares of issuing company until its expiry at some fixed price.

Diluted EPS  (In context of share warrant) - It is a measure to calculate effect on EPS if the above mentioned warrant is exercised, i.e holder opts to buy the shares at given fixed price.

The increase in Weighted average number of outstanding shares (i.e the denominator used in calculating Diluted EPS) is as below -

Company has outstanding 70,000 share warrants exercisable at $20 each.

If all 70,000 warrants are exercised, company would receive $14,00,000 i.e (20 X 70000)

Given market price of common stock is $25,

Amount received is worth (14,00,000/25) = 56000 shares

Answe - Increase in the Weighted average number of outstanding shares = (70,000 - 56,000) = 14,000 shares