Treasury stock dilution
A company has 50 million basic shares, 10 million options with strike 8, and stock price 20. Using treasury stock method, find net new shares and diluted shares.
Worked answer
diluted Shares: 50 + 10 − 10 × 8 ÷ 20 = 56
Exercise produces proceeds; use proceeds to repurchase shares at market price.
Only the net increment is dilution.
Technical follow-ups
What if the strike were above the stock price?
At a much higher share price, how does the net dilution from these same options change, and why?
Follow-up answer guide
Out-of-the-money options add no diluted shares in treasury stock method; do not allow negative dilution.
A fresh retry
A company has 60 million basic shares, 12 million in-the-money options at a $10 strike, and a $25 share price. Calculate net new shares and diluted shares with the treasury stock method.
Inspect replacement inputs
options: 12
strike: 10
price: 25
Check the retry bridge
diluted Shares: 60 + 12 − 12 × 10 ÷ 25 = 67.2
Original fictional example. Not a report of a specific firm’s interview. Explanations need qualified human review.