DEPS

Question 1

During Year 3, the average market price of the company’s common stock was $8.

Unexercised call options to purchase 50,000 shares of the company’s common stock at $5 per share were outstanding at the beginning and the end of the year.

Answer 1

DEPS Denominator – 18,750. The options are dilutive because the exercise price is less than the average market price. The share options are accounted for in accordance with the treasury stock method. Under this method, the assumed proceeds of $250,000 (50,000 shares × $5 exercise price) are used to repurchase 31,250 shares ($250,000 ÷ $8) at the average market price during the period. The difference between the 50,000 shares assumed to be issued and the 31,250 shares assumed to be repurchased of 18,750 increases the DEPS denominator.