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A company's net income for 2020 is $50,000. It has 2,000 stock options outstanding. These options...

A company's net income for 2020 is $50,000. It has 2,000 stock options outstanding. These options were issued during 2019, each exercisable for one share at $37. None has been exercised. 40,000 shares of common were outstanding during 2020. Suppose the average market price of the company’s stock during 2020 can be 44, 46, 27, or 54. For which average market price will these stock options be antidilutive? Please enter one (and only one) of the average market prices provided by the problem.

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Expert Solution

Net Income = 50,000 | Shares Outstanding = 40,000

Earning Per Share without Options excercised = 50,000 / 40,000 = 1.25

Excercise Price for Option = $ 37 | Number of options = 2,000

Now we will calculate EPS for each average price and check if it is Dilutive or Anti-dilutive in terms of EPS.

Market Price = 44

Incremental Shares = ((Market Price - Excercise Price) / Market Price) * Number of Options

Incremental Shares = ((44 - 37)/44)*2000 = 7/44*2000 = 318,18 or 318 shares

EPS at Price of 44 = 50,000 / (40,000 + 318) = 1.24

Market Price = 46

Incremental Shares = ((Market Price - Excercise Price) / Market Price) * Number of Options

Incremental Shares = ((46 - 37)/46)*2000 = 9/46*2000 = 391.30 or 391 shares

EPS at Price of 46 = 50,000 / (40,000 + 391) = 1.237 or 1.24

Market Price = 54

Incremental Shares = ((Market Price - Excercise Price) / Market Price) * Number of Options

Incremental Shares = ((54 - 37)/54)*2000 = 17/54*2000 = 629.62 or 630 shares

EPS at Price of 54 = 50,000 / (40,000 + 630) = 1.23

Market Price = 27

Incremental Shares = ((Market Price - Excercise Price) / Market Price) * Number of Options

Incremental Shares = ((27 - 37)/27)*2000 = -10/27*2000 = -740.7 or -741 shares

EPS at Price of 27 = 50,000 / (40,000 - 741) = 1.27

If Market Price > Excercise Price, then it would be dilutive.

If Excercise Price < Market Price, then it would be Anti-dilutive.

Hence, At a Market Price of 27, these stock options would be Anti-dilutive.

jeff jeffy answered 1 year ago
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