Question

Your company has 2,000 options outstanding and each can be exchanged for one share of common stock at an exercise price of $20. The average market value for each share was $25 throughout the year. Calculate the incremental number of shares that will be used for the December 31,2019 diluted earnings per share calculation using the treasury stock method (ie how many shares will you post to the denominator in your calculation

Answer 1

The incremental number of shares that will be used for the December 31,2019 is 400 shares

Step-by-step explanation:

To calculate the the incremental number of shares that will be used for the December 31,2019 first we have to calculate the Amount received from Options as follows:

Amount received from Options = Number of options * Exercise price

= 2,000 options * $20

= $40,000

Therefore, Value of options in current shares = Amount received from options / Average market value of shares

= $40,000 / 25

= 1,600 shares

Therefoe, Diluted shares = Stock options outstanding - Value of Options in Current shares

= 2,000 shares - 1,600 shares

= 400 shares

The incremental number of shares that will be used for the December 31,2019 is 400 shares