Fully Diluted Shares Outstanding

Hi,
This is my first time creating a Comparable Companies Analysis and I'm using a financial valuations book to help guide me through the process. I'm a bit confused on calculating equity value. I know the equation is Share Price x Fully Diluted Shares Outstanding, but I'm confused about calculating the Fully Diluted Shares Outstanding. The book explains that this value is Basic Shares Outstanding + In the Money Options & Warrants + In the Money Convertible Securities. I have the Basic Shares Outstanding from the cover of the 10q, and I think I have the In the Money Options (I got this from the 10k which shows a line item stating "Outstanding end of year" but it is next to a column that states "Weighted Average Exercise Price")

     So my questions are essentially, 

1. Is the Line item "outstanding end of year" the shares that are supposed to be "In the Money" options?
2. Also, I'm a bit confused if the options count as "In the Money", because from what I read in the book, options are considered "In the Money" when the company's share price passes the exercise price, but for this company the share price is currently $279.47, while the Weighted Average Exercise Price is $490.06. Would this still count as "In the Money" Options or in this case do I just leave off Options from my Fully Diluted Shares Outstanding?
3. Lastly, Where would I find "In the Money" Warrants and Convertible Securities, they aren't in the 10K or 10Qs?

 

Don't have time to look up Chipotle's filings on EDGAR so will answer your questions to best of my ability without specifics.

1) If it says just "outstanding end of year" it is best not to assume if it is a fully diluted or basic share count. Its best to calculate f.d. shares yourself 2) In The Money options / warrants are basically instruments where it is profitable for them to be exercised. In your example, since the Weighted Average Exercise Price is above the strike price, the Weighted Average Options / Warrants will not be exercised. Simply because, the holders will not profit. On a side note, be careful of using Weighted Average option / warrant metrics - this may not be 100% accurate as it is an average of all the option / warrant tranches the company has. It is better to find their option / warrant schedule and examine each tranche 3) I have always been able to find option / warrant schedules in the 10-K or 10-Q, but if you can't, keep digging into their supplementary docs, such as MD&As

 

Hi! Thank you for your kind reply. I still have some questions.

1). For the formula [Diluted shares outstanding = Basic shares + In-the-money options - Shares repurchased under TSM], I would like to know what the "basic shares" here refers to. Does it mean the number of "Weighted Average Shares Outstanding" in Income Statement or the number of "Common & Preferred Stock Outstanding" in Balance Sheet?

2). The information below is what I have found from Chipotle's10K notes to financial statements.

2016  - Shares & Weighted Average Exercise Price Per Share
  • Outstanding, beginning of year ----- 1,694,000 Shares ------ $ 490.70
  • Granted ----- 460,000 Shares ------- $ 457.77
  • Exercised ----- (124,000) Shares ------ $ 315.87
  • Forfeited or cancelled ----- (113,000) Shares ----- $ 559.25
  • Outstanding, end of year ----- 1,917,000 Shares ----- $ 490.06
  • Vested and expected to vest as of December 31, 2016 --- 1,851,000 Shares ----- $ 489.18
  • Exercisable as of December 31, 2016 ---- 846,000 Shares ------ $ 422.32

If Chipotle's current price is 320.09 USD, which numbers above are the in-the-money shares and their exercise price?

What if Chipotle's current price is 600.00 USD?

Thank you very much for your kind help! :)

 
Best Response
  1. For a multiples valuation, I use the exercisable options only, outstanding includes options that have been granted but haven't vested. You only want to account for exercisable options because if someone with unvested options leaves the company before their options vest then there was never a time when their options would have increased the share count and therefore no effect on the diluted share count.

  2. If I have to pay $490.06 for something that is worth $279.47, would I want to do that if I can buy the same thing for $279.47? Heck no! The concept of "in the money" is that an option is ITM if a profit can be made from exercising the option today and if it's "out of the money" then the best you can do is buy shares at the market rate. If the share price was $500 then you'd exercise and could immediately realize a gain of ~$10 per share. The reason that it's dilutive is because we use the treasury method which means that we assume that the company with the options would exercise the ITM options and immediately repurchases as many shares as it can at the current price. So the company would repurchase ~2% of the shares exercised from options if the current price was $500.

  3. If they're not on the 10K then they don't have any. It's possible that there may not be much detail on them but companies are required by the SEC to put that info in their 10K (optional for the Q).

If you're looking at M&A, then you'd use outstanding options because M&A almost always causes options to automatically vest. You also use the acquisition price vs the strike to calculate the FDSO.

 

Hi! Thank you for your kind reply. I still have some questions.

1). For the formula [Diluted shares outstanding = Basic shares + In-the-money options - Shares repurchased under TSM], I would like to know what the "basic shares" here refers to. Does it mean the number of "Weighted Average Shares Outstanding" in Income Statement or the number of "Common & Preferred Stock Outstanding" in Balance Sheet?

2). The information below is what I have found from Chipotle's10K notes to financial statements. 2016 - Shares & Weighted Average Exercise Price Per Share

  • Outstanding, beginning of year ----- 1,694,000 Shares ------ $ 490.70
  • Granted ----- 460,000 Shares ------- $ 457.77
  • Exercised ----- (124,000) Shares ------ $ 315.87
  • Forfeited or cancelled ----- (113,000) Shares ----- $ 559.25
  • Outstanding, end of year ----- 1,917,000 Shares ----- $ 490.06
  • Vested and expected to vest as of December 31, 2016 --- 1,851,000 Shares ----- $ 489.18
  • Exercisable as of December 31, 2016 ---- 846,000 Shares ------ $ 422.32

If Chipotle's current price is 320.09 USD, which numbers above are the in-the-money shares and their exercise price?

What if Chipotle's current price is 600.00 USD?

Thank you very much for your kind help! :)

 

Not every one is a buyer at a certain price. If a ton of people want to sell and a few want to buy, the price will drop. Eventually the price will get so low that more buyers will enter and it will equalize. Stocks that don't have a lot of buyers or sellers are illiquid and typically have larger price movements than liquid stocks like GE, Pfizer, etc.

Liquidity is important, especially if you have a sizable position. j

 

Basic shares on the income statement that are used in calculating EPS are a weighted average number for the entire period, while share count on the balance sheet is a period-end number of shares outstanding on the last day of the quarter.

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