I know you're supposed to use treasury stock method to calculate total shares, but pretty much every company has "diluted shares outstanding" in their 10k.
This should already take into account options, right? If so, why is there always a treasury stock method section?
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diluted shares outstanding includes options warrants converts etc to begin with but does not assume repurchase of common shares with the proceeds from those. so if the options etc bring in cash, then that cash is used to buy back shares in the open market to lower diluted shares. the reported number is just the possible number of shares outstanding if everything was converted
When you are finding enterprise value at a specific point in time the share price will obviously be different than is reflected in the 10k resulting in shares that may be exercised, resulting in dilution
I believe the treasury stock method is applied on the figures on the financial statements, but correct me if i'm wrong.
The diluted shares figure in the 10k is the weighted average diluted shares oustanding, used to calucualte the diluted EPS. For valuation purpose, the conversion of the diluted shares represents the shares oustanding at a point of time, so the figures will be different.
The other factor to keep in mind is that the diluted shares number in most financial statements only takes into account options/warrants that are currently vested/exercisable. They typically do not include dilution from securities that may vest or otherwise become exercisable upon a change of control.
Additionally, the fully diluted share count may not include the appropriate dilution from convertible debt if the impact adding the convertible shares would be "anti-dilutive" (for example, in the case of a company with negative earnings, a higher share count would result in a "less-negative" EPS).
This is why it is necessary to perform the fully diluted share calculation separately and not rely on the figures given in public filings or earnings announcements.
Diluted Shares Outstanding (Originally Posted: 07/30/2013)
I have a question regarding the calculation of diluted shares outstanding.
I understand how to include options using the TSM, but can you explain how to include vested and unvested Restricted Stock and Restricted Stock Units, in the diluted shares calc? I imagine you only add the shares to the basic shares outstanding figures, but am having a hard time finding information regarding the treatment of vested / unvested and RSU and Restricted Stock.
Also, are vested Restricted Stock and vested Restricted Stock Units already included in the total shares outstanding figure? If that’s the case, then I only need to add the unvested portion to the basic shares outstanding?
Thanks for your help!
I currently just treat them all as dilutive. They shouldn't be part of NOSH.
Basic vs. Diluted Shares Outstanding (Originally Posted: 11/17/2013)
When calculating EPS for public market investing purposes, do you calculate basic or diluted shares outstanding? Also, do investors focus on GAAP EPS or adjusted EPS?
Thanks guys!
You can do either. Both can be important metrics, depending what kind of analysis you are doing. Investors care more about adjusted EPS (sometimes diluted adjusted EPS). They won't always take the Adj EPS that the company provides at face value though. Many investors take GAAP EPS and make any and all (or no) adjustments that they feel are necessary to arrive a good indication of a company's ongoing financial performance.
Thanks man. How about basic vs. diluted? What's the rationale of looking at one or the other?
Based on the number of questions that you have been asking I would suggest you check out an online resource such as Coursera's Wharton Online Accounting class, which is currently wrapping up but all of the videos are still available. There is a very helpful video on this specific topic. Also, investopedia offers a pretty straight forward explanation.
The rationale for focusing on diluted EPS is because it is the most conservative perspective and you have to assume that you will be diluted down (which is obviously a bad thing...as share counts increases you are getting less of the pie).
Diluted EPS will always be the same or lower than basic EPS because of the changes in the denominator (share count), which are determined based on whether or not the company has convertible securities (such as convertible debt, convertible preferred, options/warrants, etc. ). For example, if a company has convertible debt you would calculate the numerator and denominator on an as converted basis (assume beginning of year) so in the numerator you would add back after-tax interest expense to earnings (because there would be no convertible debt as it would have been converted to common) and the denominator would be increased by the converted # of shares. In the money options would increase the denominator while out of the money options would have no effect.
One important note is that convertible securities are really only an issue when the company and the stock are performing well. In a down case scenario, convertible debt holders would be unlikely to convert to riskier common and option holders would be unable to convert (assuming the stock price is languishing below the option strike price).
Diluted Shares (Originally Posted: 06/03/2008)
Can someone please explain what is mean by diluted shares? How are they calculated? Thanks sorry for the basic question.
http://www.ibankingfaq.com/category/interviewing-technical-questions/#v…
There's a pretty good set of questions (in the Enterprise Value and Equity Value section) that explain this.
Basically though, the difference between common shares and fully diluted shares is that fully diluted is the number of shares outstanding, plus all of the number of shares that could be exercised via stock options, convertible debt, etc. Therefore, there is a "dilutive" effect on the EPS for the company, because, holding the earnings constant, the EPS would be lower given the higher number of shares in the market.
Sorry if that doesn't completely make sense, but I'm always bad at typing out accounting stuff. That link should cover most of it though.
that makes a little more sense.
Didn't read the link, but Diluted shares should be used when calculating EV because it provides a more accurate value of companies than just 'shares outstanding'. CapIQ has a formula for it, but it is best to always get the diluted value directly from a company's latest 10 filing. It will show the most up-to-date total shares outstanding and also show their Option Table, which can be used to calc the # of shares to add in via in-the-money options.
Diluted shares - 6 months end vs 3 months end (Originally Posted: 08/30/2014)
Hi all,
If firm states its 3 months end's diluted shares as 136.667 million shares and 6 months diluted shares as 136.066 million. Which number should I use for the fully diluted shares outstanding?
The full financial #s are like this: 3 months ended: June 28, 2014 - 136,677
June 29, 2013 - 122,749
6 months ended: June 28, 2014 - 136,066
June 29, 2013 - 119,920
I am self-studying valuation through books and need help. Thank you so much for your time.
neither - the filings are giving you an average share count over that period. if you're doing valuation you should use current share price and options / warrants schedule to get to today's diluted share count and use that. if you're doing a DCF or CF-based analysis of sorts then you'd take the implied equity value and use the current options / warrants schedule to back into an implied share price
ricottacheese: Thank you so much. Really appreciate it.
Just an add-on to the previous comment--you can usually find a basic shares outstanding number in a 10-k/10-q as well.
also to add on: latest options / warrants schedule will always be in the 10k and if you're lucky there will be an updated one in latest Q as well (although companies don't need to provide that detail quarterly)
Treasury Stock Method - # of options in the money (Originally Posted: 08/25/2013)
Hi,
I have a question regarding the Treasury Stock Method.
The TSM is used to find the diluted # of shares. The number of shares in the money are subtracted by the amount of shares the company can buy back with the proceeds the company will get from the exercising of the options (assumption) - calculated by using the weighted average exercise price.
Anyways, I just wanted clarification that the # of options in the money only include options issued by the company in question and not by other institutes (Banks, Hedge Funds...).
As I see it, options issued by a financial institute would not dilute the # of shares, because it would need to buy the companies stock on the open market when the option is exercised.
Thanks, Chris
Why would options issued by another entity affect the company you are modeling? The point of TSM is to account for additional shares that can be created by the exercising of options that are in-the-money. As you obviously know, exercising these contracts creates additional shares (thus dilution), but TSM states that all proceeds from these contracts being exercised will be used to buy back new shares. i.e. $Proceeds / Current Share price = Additional shares purchased. (Subtract that from your amount).
Only includes options issued by the company. Also, be careful saying "number of shares in the money." As far as I know, there is no such thing as a share in the money.
I obviously meant to write number of options ITM - sorry about that!
I asked because in the textbook I read, it did not clarify who the underwriter is - just wanted to make sure I understood the concept.
Thanks guys
It is "options in-the-money," and these options are issued by the company only.
Options for TSM Calculation (Originally Posted: 01/25/2015)
When spreading options tranches to calc FDSO, do you pull the options outstanding and their respective exercise prices or the options exercisable and their respective exercise prices? I've always pulled the options outstanding and that's how our models are set up, but I just got a model from a bulge bracket that is co-advisor on a deal with us and they are using the options exercisable in their FDSO calc.
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