FA Module 7 Diluted EPS for stock options reverse practice exam questions
(The attached PDF file has better formatting.)
In 20XX, a firm has 410 common shares outstanding and 53 executive stock options outstanding.
The average stock price during 20XX is 117, and the firm pays shareholder dividends of 4 per share. The corporate tax rate is 10%. In 20XX, the firm’s
● Basic earnings per share = 4.2683
● Diluted earnings per share = 4.1447
The firm has no dilutive securities besides the executive stock options.
Question 7.1: Net income and diluted earnings per share
What is the firm’s net income?
Answer 7.1: 410 × 4.2683 = 1,750.00
(net income = weighted average shares outstanding × basic earnings per share)
Question 7.2: Treasury stock method numerator
What is the numerator of the diluted EPS ratio using the Treasury stock method?
Answer 7.2: 1,750
Question 7.3: Treasury stock method denominator
What is the denominator of the diluted EPS ratio using the Treasury stock method?
Answer 7.3: 1,750 / 4.1447 = 422.2260
(denominator = numerator / diluted earnings per share)
Question 7.4: Shares added
How many shares are added by exercise of the stock options minus repurchase of shares in the Treasury stock method?
Answer 7.4: 422.23 – 410 = 12.23
Question 7.5: Shares repurchased
How many shares are repurchased in the Treasury stock method?
Answer 7.5: 53 – 12.23 = 40.77
(Stock options exercised – additional shares)
Question 7.6: Cash used to exercise the stock options
How much cash was used to exercise the stock options in the Treasury stock method?
Answer 7.6: 40.77 × 117 = 4,770.09
(average stock price × additional shares)
Question 7.7: Exercise price of stock options
What is the exercise price of the stock options?
Answer 7.7: 4,770.09 / 53 = 90.00
(cash used to exercise the stock options / number of stock options)