In short
The treasury stock method measures the dilution from options and warrants for diluted earnings per share: it assumes they are exercised and the proceeds are used to buy back shares at the average market price for the period.
Key takeaways
- Incremental shares = shares issued on exercise − shares bought back with the proceeds.
- Options whose exercise price exceeds the average market price are antidilutive and left out.
- Convertible securities use the if-converted method instead.
Example
10,000 options at $20 with an average price of $25: proceeds of $200,000 buy back 8,000 shares, so 2,000 incremental shares.
Where it's tested
FAR: Equity & Earnings Per Share — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has 10,000 stock options outstanding with an exercise price of $30. The average market price of the stock during the year was $25. How should these options be treated in the diluted EPS calculation?