How do you find fully diluted shares outstanding?

The treasury stock method is used to calculate fully diluted shares outstanding. Typically, companies will tell you common shares outstanding and options outstanding in the MD&A section of their financial statements.

Options give people the right to buy stocks at a specific price, also known as the strike price. Usually, options will be listed at various different tranches of strike prices. If the strike price is lower than the stock price, then the option is “in-the-money,” meaning the option holder would earn a profit if they bought the stock at the strike price and then immediately sold it for the higher stock price.

For example, if the stock price is $10, and there are three tranches of options with strike prices of $6, 12, and $15, then only the tranche of $6 options are “in-the-money.”

In the treasury stock method, we assume these in-the-money options are exercised, meaning that the optionholder uses their right to buy the stock. This means we effectively add the number of in-the-money options to the share count. However, the company also receives cash for this exercise of options, since the optionholders have to pay for the shares, even if they are just paying for the strike price. The amount of cash received is equal to the strike price x number of ITM options. We assume that this cash received will be used to buy back shares at the strike price, so the share count is reduced by that amount, and we arrive at fully diluted shares outstanding.