There was also a game in training (or I should say while training was going on) that involved trying to fly penguins across the screen for as long as possible. Why would you pay attention to a 2-year banking flame-out teaching (incorrect) finance concepts when you have that type of entertainment? Whatever. I still learned everything, including the fact that market cap. on Yahoo! finance is in fact not fully diluted.
So what does "diluted" mean? Bankers use the term as often as MBA students ask stupid questions to feel valuable, so there's no way to tell by context. For this post, when additional shares of a company's stock are issued, they "dilute" the ownership of existing shareholders. Market cap. does not account for this dilution, as it is calculated by multiplying share price x basic shares outstanding. So when a company has issued options, any new shares from option exercises would be added to the basic share count in order to calculate fully diluted equity value. The common method of accounting for these potential dilutive effects is the treasury stock method, which states New Shares = Options - (Options x Exercise Price)/(Current Price).
Using a blank spreadsheet, assume a company employee has 100 (cell A1) options at a $10.00 (A2) strike price, and the current stock price is $15.00 (A3). In this example, the employee will exercise his options to buy 100 shares, as he can immediately sell them for a net gain of $5.00 per share. The company will then buy back as many of those shares as possible at the current price to minimize the dilutive effect of the option exercise. Here are two ways to lay out the treasury stock calculation:
- =+IF(A3>A2,A1-A1*A2/A3,0)
- =+MAX(A1-A1*A2/A3,0)
-F-One
