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Hi Sir. Please can you help with this question. I think I am doing it correctly..but the answer I get is not an option. I think there might be an error in the question.. please can you check my workings.
AB plc has 2.5 million weighted average number of ordinary shares in issue for year
ending 31 March 20X4. The company also has a share options scheme in operation. They have issued options to purchase 200,000 shares at $5.50 per share on 1st April 20X3. These options are exercisable between 1st April 20X8 and 31st March 20X9.
The share price averaged $6.25 during the current year ending 31st March 20X4.The weighted average number of shares to be used in the calculation of the diluted
earnings per share for year ending 31st December 20X4 is:A 2,500,000
B 2,530,769
C 2,200,000
D 2,527,2731- No of share options = 200,000
2- Market value of shares= (200,000*5.50/6.25) = 176,000
3- difference= 200k-176k=24k24k is the number if free shares
therefore the new weighted average number of shares that will be used In the calculation is 2.5m+24k=2,524,000???
Hi,
I agree with your calculations, so unless we’re both missing something then I’d say that there is a mistake in the question.
I’ve had a play about with the numbers and I’m guessing that the answer they’ve given is D. Is that correct? If it is then I think they’ve got the $5.50 and $6.25 the wrong way round in the calculation.
If you do 200,000*(6.25/5.50) you get 227,272, which is 27,272 different to the 200,000. If you add the 27,272 to the 2.5 million we get answer D. Although this gives the “correct” answer possibly it isn’t right as why would you pay to get 200,000 options when you could get 227,272 on the open market. The whole idea is to get more shares under the option than at full market value.
Is this question in a P2 set of materials? I only ask as even though it is on the syllabus it hasn’t ever been examined in my experience and I can’t see it making an appearance either.
Thanks
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