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The treasury stock method is a way for companies to compute the number of additional shares that can possibly be created by un-exercised, in-the-money warrants and stock options. These new additional shares can then be used in calculating the company’s diluted earnings per share (EPS). The treasury stock method implicitly assumes that the proceeds the company receives from in-the-money option exercises are then used to repurchase common shares in the market. Repurchasing those shares turns them into treasury stock, hence the name.
Treasury Stock Method Formula:
Additional Shares Outstanding = Shares from Exercise – Repurchased Shares
Additional Shares Outstanding = n – (n x K / P)
Additional Shares Outstanding = n (1 – K/P)
N = Shares from exercise
K = Strike price
P = Average share price for the period
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