Why do we have to calc fully dil shares in comps instead of just pulling them off of the 10-k p&l?

Because that 10K you are looking at marks the diluted shares O/S as of the end of their fiscal year, which in most cases, could be December 31st 2012. So you are missing 7 months that you need to account for. In order to make it current, you would have to use the treasury stock method and calculate as you normally do by calendarizing those diluted shares O/S you see on the 10K, add the new diluted shares O/S for the current stub (Q1 and Q2 - Can be found in the 8K) and then subtract the same stub of the previous year. That will give you current LTM shares O/S. Basically, it is just more current and accurate than what you are reading.

by "stub" do you mean the additional shares added in that stub or the total shares outstanding in that stub?

So in my example, the stub period would be January 1 to the end of the most recent quarter. So in this case, January 1st to June 31st would be your current stub because you can locate the necessary diluted O/S of this stub by looking at the previous 8K's or other documents that were filed (assuming it is public).

So yes, calculate the additional diluted O/S of this period and add it to the fiscal year 2012 that you see on the 2012 10K, but then subtract diluted shares O/S in the same stub (Jan 1 to Jun 31) of the previous 2012 year. That will give you LTM diluted O/S. Hope that helps

I am sorry, ignore what I said above. I actually don't think all of that is necessary. The 8K should have the most recently updated basic shares outstanding on it. Once you have that, it will also have the current outstanding Options/warrants/convertibles that are in-the-money, and then use TSM like you normally would.

Forget the stub period thing, you actually shouldn't need to do that. All the info should be on the 8K statement of the most recent quarter ended June 31st in our example.

Cuz bankers are retarded and spend time on shit that doesn't matter. Spend 100000 hours on adjusting nosh to 35 dec points then take completely wrong consensus ebitda and call it a comp !

But now that we hae the most recent 10-Q, why don't we just take the "Weighted average number of diluted shares and diluted share equivalents outstanding" at the bottom of the P&L? Doesn't that already take into account share conversions and option exercises? Why do we need to go find the convertible debt and in-the-money options if that number (at the bottom of the P&L) already takes those things into account?

Any link to a place that does a good example of how to compute using the treasury method?

To be honest, I am not sure exactly what the diluted shares O/S line on the 10-Q is using to calculate it. I do not think that they use TSM to convert any convertible warrants/options in their statement. That is a method that bankers do I think, similar to adding back non-recurring items when creating a model. Why doesn't the company just do that? Not sure it that is a good analogy but I think using TSM and doing it this way is just a respectable method that all bankers use. What's listed on their statements is not "accurate" enough, and does not factor in any options that are exercisable due to the fact that they are in-the-money. I could be wrong on that, so maybe someone else could clarify on that.

And floppity, have you read the Rosenbaum and Pearl book? The first chapter talks about how to correctly calculate dilution, as it is very important and is used in a lot of different models in banking. It is also covered on the WSO/Vault guides if you have those. I would suggest just looking it up online. There is a ton of material on it.

Just to give you a brief explanation: TSM is when you take the basic shares outstanding, but add any convertible options that are in-the-money (i.e. the exercise price is below the current price) and warrants/convertibles which can all be found on the most recent 10K, but to be more accurate and up to date like we are talking about, use the 10Q information. So TSM basically assumes that all options exercised will generate proceeds, but then the company uses those proceeds to purchase more shares back.

Example: MonkeyBiz Inc. has 100 million basic shares outstanding at $40.50 per share. As of the date you are calculating dilution, they have $1 million options that are in-the-money and exercisable at a price of $35 per share. You exercise all of these options, which will give you $35 million in proceeds from these options. The company now has 101 million shares outstanding. But, you then assume the company uses the funds to purchase back shares with that incremental $35 million. 35 million / 40.50 = ~864,197 shares purchased. So you subtract that from our 101 million. Now, the company's diluted shares outstanding is 100,135,803 million.

Oh true that makes sense, good find. And I hear ya on searching through the 10K. They are definitely a bitch at times. I am sure you already know this, but I highly recommend using Ctrl+F when looking through a 10K. This will enable you to search for keywords which will navigate you through the document. Do that with keywords such as "Options or Tranche." That will usually bring you there.

Gracias, amigo.

With convertible bonds are you assuming that all the bonds convert if it's above the conversion price and none if they aren't (what I'm currently doing in a model)?

leveredarb:

Cuz bankers are retarded and spend time on shit that doesn't matter. Spend 100000 hours on adjusting nosh to 35 dec points then take completely wrong consensus ebitda and call it a comp !

This.

TSM feels 'accurate' but it's still really theoretical. It's not like every convert and option in issuance gets exercised the moment they're in the money.

The only time this stuff actually matters is when there is a huge amount of ITM converts (unusual), or you're calculating something like takeout cost, but that's another piece of analysis since the convert terms will be subject to a change of control adjustment. So yay... you just wasted a bunch of time for nothing.

thewaterpiper:

leveredarb:

Cuz bankers are retarded and spend time on shit that doesn't matter. Spend 100000 hours on adjusting nosh to 35 dec points then take completely wrong consensus ebitda and call it a comp !

This.

TSM feels 'accurate' but it's still really theoretical. It's not like every convert and option in issuance gets exercised the moment they're in the money.

The only time this stuff actually matters is when there is a huge amount of ITM converts (unusual), or you're calculating something like takeout cost, but that's another piece of analysis since the convert terms will be subject to a change of control adjustment. So yay... you just wasted a bunch of time for nothing.

You're right, but isn't the point of the doing this when calculating Equity Value, than to Enterprise Value, is to see the total value of the Firm if acquired? In that case, then yes, every ITM option/convert would be converted into basic shares. Correct me if I am wrong here, but when a company is acquired, all in-the-money contracts get automatically exercised. So in this case, and due to the purpose of the calculation, TSM seems pretty accurate and all shares definitely do get exercised by being in-the-money (Assuming our valuation is for acquisition purposes).