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Hi Teacher,
Can you explain the logic of this question for me?
Q: A co has net profit of $1,200,000 during the year and 500,000 shares in issue. the company gave its CFO an option to purchase 200,000 shares at the price of $15 per share on 1 July X1. The average fair value of share during the year is $20.
Calculate basic and diluted EPS.
A: B.EPS= 1200000/500000=2.4
testing of dilution:
Dilute because $15 <$20
diluted EPS= 1200000/500000+(200000× 5/20 ×6/12)
i dont understand why it is 5/20,not 15/20 or 20/15When the option is exercised it will raise 200,000 x $15 = $3,000,000
If the entity had wished to raise $3,000,000 during the year, they could have done so by issuing 150,000 shares at $20 each
So, 200,000 x $15 is the equivalent of 150,000 x $20 plus 50,000 shares issued free
And it’s those FREE shares that are the diluting shares
Surely the course notes explain all this!
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