Case 45 / 183 Analyst

Diluted Share Count

Valuation & DCF

The prompt

“Walk me through how you would calculate a company's fully diluted share count, including the treasury stock method for in-the-money stock options and the if-converted method for convertible securities.”

📋 What you're given

Walk me through how you would calculate a company's fully diluted share count, including the treasury stock method for in-the-money stock options and the if-converted method for convertible securities.

1. Task Overview

Task: determine the total diluted share count by testing each potentially dilutive security and adding only the shares that actually increase the count.

Step 1: Given Data

Here is the capital structure you're working with.

Line ItemValue
Basic shares outstanding100.0m
Stock options outstanding8.0m
Weighted-average exercise price of options$20.00
Current share price$25.00
Convertible notes outstanding (face value)$150.0m
Conversion price of convertible notes$30.00

Step 2: Treasury Stock Method for Options

Show Treasury Stock Method Formula

Net New Shares from Options = Options Outstanding − (Options Outstanding × Exercise Price) / Current Share Price

Using this formula, compute the net new shares created by the outstanding options.

Step 3: If-Converted Test for the Convertible Notes

Show If-Converted Test Formula

As-Converted Shares = Face Value / Conversion Price; include only if Conversion Price is below the Current Share Price

Using this formula, determine whether the convertible notes should be included in the diluted share count.

Step 4: Total Diluted Share Count

Show Diluted Share Count Formula

Diluted Shares = Basic Shares + Net New Shares from Options + As-Converted Shares (only if dilutive)

Assume:

  • A security is only added to the diluted count if it is dilutive (i.e., it would increase the share count) — anti-dilutive securities are excluded entirely, never subtracted.

Using these inputs, compute the total diluted share count.

💡 Model answer

Try answering out loud first — then reveal the model answer and compare.

⚠️ Common mistakes

  • Adding the full option count (8.0m) instead of just the net new shares from the treasury stock method (1.6m)
  • Including out-of-the-money options or anti-dilutive convertibles in the diluted count instead of excluding them entirely
  • Subtracting anti-dilutive securities instead of simply leaving them out
  • Applying the treasury stock method to convertible notes instead of the if-converted test (they use different mechanics)
  • Forgetting that the ITM/dilutive test compares exercise or conversion price to the current share price, not to book value or par value

🔁 Follow-up questions

Previous Case 44: LTM vs. NTM Multiples Next Case 46: Sensitivity Analysis: WACC vs. Terminal Growth Rate

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