Warrants exercisable at $20 each to obtain 60,000 shares of common stock were outstanding during a period when the average 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 shares by

Question

Quizplus · Accepted Answer

The treasury stock method assumes that the proceeds from the exercise of the warrants will be used to buy back common stock at the average market price. Therefore, the increase in the weighted average number of outstanding shares is calculated as follows:

Number of shares from exercise of warrants = 60,000
Option price per share = $20
Average market price per share = $25
Intrinsic value per share = $25 - $20 = $5
Number of shares bought back with proceeds = 60,000 x $20 / $25 = 48,000
Weighted average number of outstanding shares = 48,000 + 60,000 = 108,000
Increase in weighted average number of outstanding shares = 108,000 - 96,000 = 12,000

Therefore, the correct answer is C) 12,000.

Warrants Exercisable at $20 Each to Obtain 60,000 Shares of Common