G Ltd was incorporated in 20x1 with share capital of 20,000,000 ordinary shares of $1 each.

On 1 January 20x3, G Ltd issued options to the public to buy 10,000,000 of the companys ordinary shares at an exercise price of $1.40 per share, exercisable from January 20x5.

G Ltds profit after tax was $10,000,000 for the year ended 31 December 20x3. The average market price of G Ltds ordinary shares during the year 20x3 was $2 per share.

Questions:

(a) How do we assess whether share options are dilutive or anti-dilutive? Are G Ltds share options dilutive or anti-dilutive? (b) How do we compute diluted EPS for a company that has dilutive options? Why is the method for computing diluted EPS different for a company that has dilutive share options versus a company that has dilutive convertible securities? (c) Compute the basic EPS and diluted EPS for G Ltd for the year ended 31 December 20x3. Present your answers in dollars and round off your answers to four decimal places. (d) Explain the double dilutive effect of employee stock options and how it is dealt with in the computation of diluted EPS.