Confusion about Treasury Stock Method when Calculating Diluted Shares Outstanding
Hi all,
Sorry in advance for what is most likely a very basic question.
While the math for calculating diluted shared outstanding is obviously very simple, I'm a bit confused on the logic.
From what I understand, "exercising" an in-the-money option can either mean buying shares at a lower price than market value or selling shares at a higher price than market value, as some options are for buying and some for sale.
So, if the options are exercised by buying shares at a lower price, I understand the logic. For example, if 10,000 shares were bought at a price of $3, and market price is $5, then it would be 10,000 (for all the ones bought) - 6,000 (ones bought back by company) = 4,000 extra shares outstanding. Makes sense to me.
However, if the options are exercised by selling shares. Say, the consumers have options that say they can sell at $8, and the market price is $5. Also assume there exist 10,000 shares in-the-money. Then, the change in shares outstanding would just be 10,000, and the company would be able to buy no more shares because they have already lost $80,000 (no proceeds to put towards purchasing outstanding stock)?
How can the formula be applied to the second situation? Or am I just misunderstanding options (can they only be used to buy)?
EDIT: Question 2:
Why do we not assume that the proceeds from convertible bonds will be used to purchase back outstanding shares, while we do make that assumption for options?
Thank you!
Stock option grants are a way to align employee interests with shareholder interests, In other words, if you do very well, the stock will increase, and you(having received the options) will benefit.
It doesn't' make sense for a company to issue put options, which is what you suggested. That doesn't incentivize. In fact, it could de-incentivize if you already own stock to tank the company, then "put" it back to them at a profit.
Awesome, thank you.
So, essentially, the situation of put-options isn't even considered because it doesn't exist?
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