Stock options exercisable at 15 each to obtain 25000 shares

Stock options exercisable at $15 each to obtain 25,000 shares of common stock were outstanding during a period when the average and year-end market price of the common stock was $30. Application of the treasury stock method for the assumed exercise of these stock options in computing diluted earnings per share will increase the weighted-average number of outstanding common shares by

Question 7 options:

a)

12,500

b)

10,000

c)

5,000

d)

11,000

Solution

SOLUTION

Increase in weighted average no. of shares = 12,500

Exercisable price to obtain 25,000 shares in stock option plan = $15

Market price = $30

Total amount = No. of shares * Price per share

=25,000 * $15 = $375,000

But market price given is $30-

No. of shares purchased = Total amount / Market price per share

= $375,000 / $30 = 12,500

Hence, we can purchase only only 12,500 shares as per market price

Increase in weighted average no. of shares = No. of shares outstanding - No. of shares at market price

= 25,000 - 12,500 = 12,500