Final answer:
The dilutive effect of issuing 40,000 options at $15 per share when the market price is $20 is calculated using the treasury stock method. It results in 8,000 incremental shares, assuming the proceeds are used to repurchase shares.
Step-by-step explanation:
The question pertains to the dilutive effect of issuing 40,000 options at an option price below the average market price. When a company issues options at $15 per share while the average market price is $20, the options have an intrinsic value of $5 per share upon issuance.
To calculate the dilutive effect, also known as the number of incremental shares, we use the treasury stock method, which assumes that the company will use the proceeds from the exercise of options to repurchase shares at the average market price to offset the dilution.
The formula to calculate the incremental shares would be: Number of options x (Market price - Option price) / Market price. Substituting in this case: 40,000 x ($20 - $15) / $20, which results in 8,000 incremental shares.
It's crucial to note that the provided reference on present value calculations and PDV of total profits is not directly relevant to the dilutive effect from stock options. However, understanding present value is critical in financial decisions, as it helps to assess the value of future cash flows in today's terms considering a specific interest rate.