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Question:

The average market price of a company’s stock over the year was $40 and the price at the end of the year was $50. The company’s capital structure included:
•Warrants on 10,000 ordinary shares with an exercise price of $35.
•Options on 20,000 ordinary shares with an exercise price of $30.
The number of inferred shares that will be used in the computation of diluted EPS is closest to:

A 6,250.
Explaination

The warrants and options are dilutive, as their exercise prices are lower than the average market price of the company’s stock over the year.
Proceeds to company from exercise of warrants = $35 x 10,000 = $350,000
Number of shares repurchased at average market price = $350,000/ 40 = 8,750
Net increase in number of shares outstanding = 10,000 − 8,750 = 1,250
Proceeds to company from exercise of options = $30 x 20,000 = $600,000
Number of shares repurchased at average market price = $600,000/ 40 = 15,000
Net increase in number of shares outstanding = 20,000 − 15,000 = 5,000
1,250 + 5,000 = 6,250