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diluted eps

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › diluted eps

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  • November 9, 2012 at 4:45 pm #55143
    maria62
    Member
    • Topics: 5
    • Replies: 1
    • ☆

    Dear Mike,

    A question says: the directors of Rebound were granted options to buy 2million shares in the company for $1 each. The average market price of Rebound’s shares for the year ended was $2.50. What is the effect in calculating diluted eps? The answer says that i will add 1200 to ordinary shares. I thought that only 800 should be added(2m/$2.5)Why?

    Thanks!

    November 10, 2012 at 12:00 am #106927
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23200
    • ☆☆☆☆☆

    Set your working out like this:

    2,000,000 @ $1 = $2,000,000

    which is the equivalent of

    800,000 @ $2.50 = $2,000,000

    and

    1,200,000 @ $0 ie free

    and it’s these “free” shares which are diluting, not the 800 equivalently issued at full market price

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