Module II· EV-Equity BridgeIntermediate
Question
How do you apply the treasury stock method to stock options?
Answer
Treasury stock method (TSM)
For in-the-money options, calculate the share dilution. Steps:
- ITM options: strike < current share price.
- Hypothetical exercise: number of options × strike = proceeds.
- Proceeds buyback: proceeds / current share price = shares repurchased.
- Net dilution: options − shares repurchased.
Deep diveShow more details
Example
Inputs:
- Options outstanding: 5m
- Strike price: $40
- Stock price: $60
Calculation:
```
Proceeds from option exercise = 5m × $40 = $200m
Buyback = $200m / $60 = 3.3m shares
Net dilution = 5m − 3.3m = 1.7m additional shares
```
In the EqV: share count + 1.7m.
Pitfall
Ignore OTM options (no dilution effect).
Pitch tip
Document the TSM calculation in a footnote − a junior killer is taking total options instead of net dilution.