Page 30 - FINAL CFA I SLIDES JUNE 2019 DAY 7
P. 30
Session Unit 7:
24. Understanding Income Statements
Diluted EPS, p60
Stock options/warrants are dilutive only when their exercise prices < the average market price of
the stock over the year.
Use the treasury stock method to calculate the no. of shares:
• Assumes that the funds received from the exercise of the options are to purchase
shares of the company’s common stock in the market at the average market price.
tanties
• The net increase in the number of shares outstanding is the no. of shares created by
exercising the options less the no. of shares hypothetically repurchased.
Example: Treasury stock method, p. 61: Baxter Company has 5,000 shares outstanding all year. Baxter
had 2,000 outstanding warrants all year, convertible into one share each at $20 per share. The year-end
price of Baxter stock was $40, and the average stock price was $30. What effect will these warrants have
on the weighted average number of shares?
• If the warrants are exercised, Baxter receives 2,000 × $20 = $40,000 and issue 2,000 new shares.
• Given assumption that these are used to repurchase shares at the average market price of $30.
($40,000 / $30 = 1,333 shares).
• Net shares issued would be 2,000 – 1,333 = 667 shares.
