# Fully Diluted Shares

Fully Diluted Shares

Fully diluted shares outstanding represents a company's shares outstanding, adjusted for any stock options and/or potentially dilutive securities such as the equity component of convertible debt (which is debt that can be converted into equity under certain circumstances)[1][2].

Fully diluted shares contains not only those which are presently issued but those that may be claimed through conversion as well. The company needs this number of shares for their earning per share calculations because implementing fully diluted shares expands the share basis in the calculation while lowering the dollars earned per share of common stock[3]

## The treasury stock method

The treasury stock method of accounting is used to calculate fully diluted shares outstanding for options and the if-converted method is used for convertible debt or preferred stock. In the treasury method, the options are assumed to have been exercised and the proceeds from the sale of shares are used to repurchase shares in the market at the current market price, thereby partially offsetting the number of new shares issued from the options. Similarly, the if-converted method assumes that potentially dilutive securities are converted to equity. Therefore, the number of shares outstanding increases, but the amount of debt or preferred equity on the balance sheets declines, as does interest expanse ( in the case of convertible bonds) or dividends paid ( in the case of preferred equity), reflecting the fact these securities no longer „exist” since they are assumed to have been converted into common equity.

Options:

• An option is a security that allows the owner to buy a share of common stock at some predetermined price. The predetermined price is called the strike price (also known as the exercise price)

## Basic shares outstanding and fully diluted shares outstanding

Basic shares outstanding and fully diluted shares outstanding: Basic shares outstanding are the total number of shares issued and outstanding by a company. The issued and outstanding shares may be significantly fewer than the shares authorized in a company's charter or bylaws. Treasury shares ( shares that have been repurchased by the company in the open market) are considered issued, but they are not considered outstanding and, therefore, are not included in the calculation of shares outstanding.

## Fully diluted shares

Completely diluted shares are calculated by adding basic shares to additional shares that can be issued from options. To calculate the available cash based on the difference between the strike price and the current share price and to determine the number of additional shares that can be bought back for that cash

## How to calculate the effect of convertible securities on fully diluted shares

To calculate the effects of convertible securities for fully diluted shares outstanding using the if-converted method, you must determine if the convertible is in or out of the money. If it is in the money, then you would calculate the number of shares that would be issued if the convert were exercised. The steps to calculate the new shares issued for a convertible bond are as follows:

• Nominal value of bond issue/par value ( for bonds par value is usually $1.000, but not always)=number of bonds * Issue Price x (I+ conversion premium) = conversion price (usually 20-40% premium, but not always) * Par value (usually$1,000, but not always)/conversion price – conversion price = conversion ratio
• Par value (usually \$1,000, but not always)/conversion ratio = conversion price
• Number of bonds x conversion ratio = number of new shares issued
• Conversion price < stock price then convert is „in the money’”
• If conversion price > stock price then convert is „out of the money”
• If conversion price is close to the stock price then convert is „at the money”

## Footnotes

1. Castillo J. (e.)(2006),p.126
2. Shenoy C.(e)(2008), p114
3. Carver L. (2011),p.62

Author: Andżelika Kędzior