Diluted EPS Calculation - CFA Level 1 Exam Prep

Diluted EPS Calculation

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Question

The following information is from the financial statements of Complex Capitalists for 1997 and 1998:

Dec. 31, 1997 - 1 million common shares outstanding, capital structure all-equity

March 31, 1998 - issued 200,000 common shares.

May 31, 1998 - issued 800,000 warrants exercisable at a strike of 35.

The average price during 1998 was 34 and the maximum price was 39.

Given the above example, the Diluted EPS will use how many shares?

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A. B. C. D.

D

Options and warrants enter into the Diluted EPS calculations only if the average stock price during the period exceeds the exercise price. In this case, since the average price is less than the strike price, the warrants are anti-dilutive and ignored in the calculation of Diluted EPS. Hence, weighted number of shares used = 1 million + 9/12*200,000 = 1.15 million.

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