The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to buy treasury stock at:
A)The end-of-year market price.
B)The average market price during the period.
C)The purchase price stated on the options.
D)The stock's par value.

Question

Quizplus · Accepted Answer

Diluted earnings per share calculates the potential impact of all outstanding stock options and convertible securities that could potentially dilute the earnings per share. In case of exercised stock options, the proceeds are used to repurchase shares of the company's common stock, which increases the number of shares outstanding. Therefore, diluted earnings per share assumes that the proceeds were used to buy treasury stock at the average market price during the period. This reflects the true market value of the company's shares during the period and provides a more accurate calculation of diluted earnings per share.

The Calculation of Diluted Earnings Per Share Assumes That Stock