Warrants exercisable at $20 each to obtain 20,000 shares of common stock were outstanding during a period when the average and year-end market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted-average number of outstanding common shares by
A) 20,000.
B) 16,667.
C) 16,000.
D) 4,000.

Question

Quizplus · Accepted Answer

The treasury stock method assumes that the proceeds from the exercise of the warrants are used to buy back shares at the average market price. The proceeds from exercising 20,000 warrants at $20 each is $400,000. At an average market price of $25, $400,000 would buy back 16,000 shares ($400,000 / $25). Therefore, the increase in shares is 20,000 - 16,000 = 4,000 shares.

Warrants Exercisable at $20 Each to Obtain 20,000 Shares of Common