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Options and warrants are DILUTIVE for diluted EPS only when:
AThey have been granted to employees
BThe exercise price is GREATER than the average market price (out of the money)
CThe exercise price equals par value
DThe average market price during the period EXCEEDS the exercise price (i.e. options are in the money)
Answer & Solution
Correct answer: D. The average market price during the period EXCEEDS the exercise price (i.e. options are in the money)
Only in-the-money options have economic substance to be exercised, so only they are dilutive. Out-of-the-money options are anti-dilutive and ignored for diluted EPS.
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