While calculating diluted eps in case of warrants, we only add the differential increase of shares to yΒ
Say: Savg= 20; X=10; 30 warrant options were exercised
So, we would do: y= no. of shares + (30* 20-10/20) i.e., +15
Shouldnt all 30 be added? Even though the option holder is getting them at a cheaper rate than average market price..they’re getting 30 shares so the eps would proportionately reduce irrespective of the exercise price?Β
Please explain.
When calculating diluted earnings per share (EPS) in the context of warrants or stock options, it’s important to consider the potential dilution impact on earnings. The idea is to account for the potential issuance of additional shares that may result from the exercise of these warrants or options.
The formula for diluted EPS takes into account the potential shares that could be issued upon exercise of warrants or options. The concept is to add the “dilutive” effect of potential additional shares to the denominator (the total number of shares outstanding). The numerator (earnings) remains unchanged.
So, the diluted EPS is calculated by considering not just the actual number of shares issued through the exercise of warrants, but also accounting for the potential dilution effect on the average market price per share. This is why you are using the DilutionΒ ImpactDilutionΒ Impact in the denominator.
It’s important to note that dilution impact is based on the difference between the exercise price and the average market price. If the exercise price is less than the average market price, it means the options or warrants are “in the money,” and the dilution impact is positive. If the exercise price is greater than the average market price, the dilution impact would be negative.