Question

Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator?

A. 1,003,333.
B. 1,006,667.
C. 1,010,000.

Answer 1

The denominator for diluted earnings per share would be 1,010,000 shares (1,000,000 average shares outstanding + 10,000 potentially dilutive options) divided by the average stock price of $15 per share.

Step-by-step explanation:

In order to compute diluted earnings per share, we need to consider the effect of stock options on the number of shares outstanding. For this calculation, we divide the sum of the average shares outstanding and the number of potentially dilutive shares (in this case, the options) by the average stock price. So, the denominator for diluted earnings per share would be 1,010,000 shares (1,000,000 average shares outstanding + 10,000 potentially dilutive options) divided by the average stock price of $15 per share.

Therefore, the answer is option C. 1,010,000.