Treasury Stock Method

[Gurifissu]

I have seen different types of answers for this, and I would like to settle this.

What stock price do we use to determine whether options/warrants are in-at-out of the money? I was sure we used the stock price at year end… but I have seen answers using the average stock price of the year.
On the other hand, I am pretty sure we use the average stock price to calculate the repurchased number of shares (using the proceeds from exercised options/warrants).

 

[S2000magician]

You use the average stock price to compute the number of shares you repurchase; you use the strike price to compute the amount of cash you’ll get when the options or warrants are exercised.
I wrote an article on earnings per share that covers this: http://financialexamhelp123.com/earnings-per-share-eps/

 

[Gurifissu]

Yep, i know S2000Magician. But what about the in-out of the money? We use the average market price compared to the strike price? Or the year end market price?

 

[S666]

All of the questions I have done in Schweser have used the average price for both in/out of the money decisions and to caclulate the amount of shares you repurchase.
I know Shweser isn’t the CFA Curriculum per se, but I would aqssume they use the same method.

 

[S2000magician]

Gurifissu wrote:ep, i know S2000Magician. But what about the in-out of the money? We use the average market price compared to the strike price? Or the year end market price?

It doesn’t matter: always use the average price for the repurchase.
If the options are in the money (vis-à-vis the average price), then they’ll be dilutive; if they’re out of the money (vis-à-vis the average price), then they’ll be antidilutive.