If we have a stock that trades at $45 with 100 outstanding shares. And we have 10 options at $44 with a strike price of $20, wouldn't we be in the money, but after we exercise the options go out of the money?
Market cap: ($45)(100) = $4500
10 options at $44 with a $20 strike
Treasury stock method: $4500 + 10*($44-$20) = $4,740 Diluted Equity Value
Price per share: $4,740 / 110 = $43.09
$45 > $43.09 ?
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So how is the stock trading at $45 yet the options are added to the equity value at $44? I believe this should be the same number. Also, you are forgetting to buy shares back with the hypothetical funds.
So let’s assume the share price is at $50 when the options are exercisable:
TSM: $50x 100shares + 10 ITM options x $50 = $5500
But with the options there was an average exercise price, so the firm gets $20 x 10 = $200, which can then be used to buy back 4 shares at an average price of $50.
So the new share count is 106. The average price is still $50. The diluted equity value is $5,300.
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