The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to:
A) Buy common stock as an investment.
B) Retire preferred stock.
C) Buy treasury stock.
D) Increase net income.

Question

Quizplus · Accepted Answer

Diluted earnings per share assumes that stock options were exercised and the proceeds were used to buy treasury stock. This is because when stock options are exercised, new shares are issued and the proceeds of the exercise are used by the company to buy back some of its own stock, reducing the number of outstanding shares. This reduces the denominator used in calculating earnings per share, which increases the EPS. Therefore, the correct choice is C, Buy treasury stock.

The Calculation of Diluted Earnings Per Share Assumes That Stock