How to Calculate Diluted Earnings Per Share using the Treasury Stock Method

This video shows how to calculate Diluted Earnings Per Share by using the Treasury Stock Method. A comprehensive example is provided to show how the exercise of stock warrants or stock options can dilute earnings per share.
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[@Nott_Fifi]

I have to say, after watching so many accounting videos, Michale's is the best! he not only gives the problem solutions but also explains the reason behind them.

[@xygenphantom]

Your videos help me a lot in my financial reporting 2 class... wish I f found your channel before! Great work!

[@dukejt]

Why is the shortfall 1,000 shares added to the denominator? Thanks.

[@markslesarev5024]

swear of god , this professor is so clear with his explanations.

[@MyFinancialFocus]

Love stock warrants. Interesting to see how derivatives impact the earnings per share!

[@CiekursFishing]

Sir, just wanted to leave a positive comment! Thank you for helping a beginner like me! Have a nice day man!

[@bmanq2234]

Your sense of humor is killing it :) Ferrari, nice wheels, let's do taxi :)

[@ramezgebraiel6738]

Studying for CFA and this helped alot

[@Edspira]

Good luck on the exam!

[@aapanic0811]

For anyone confused on what to do if you get a problem where the market price is below the exercise price, then you wouldn't include the options at all.

[@flake8382]

Audio cut at the end, but got the gist. So do we always dilute based on the POTENTIAL to dilute EPS? Or just the ACTUAL dilution at the end of the period?

[@Edspira]

When the audio cuts at the end, it's usually became I rambled unnecessary info and decided to remove it via editing. Regarding diluted EPS, yes, we calculate what the EPS would potentially decrease to if the options are exercised (whether or not they are actually exercised)

[@user-sm1fh1iy4p]

Thank you, lord

[@manynumeritos]

you have saved my lifeee, thank you

[@Edspira]

Glad it helped!

[@psychoctator2658]

God, this one is SO HELPFUL !! Love it a lottt

[@chrisnew1494]

this helped a lot with my intermediate accounting

[@janemandel2691]

You are really a great teacher , You should edit our e-books , so easy to be understood. Out e-book uses so long long pages to explain it , I still can't understand .your short video makes it very easy

[@nightthemare4742]

Thanks

[@BlackRose-cr8gb]

Thank you so much sir! Your videos help a lot...

[@Edspira]

Glad to hear that!

[@ItachiUchiha-ge6em]

But this example assumes the options to be OTM puts right? Because if these were ITM calls then there would be a net increase in outstanding shares? How can we know whether these options are puts or calls?

[@xj7937]

This example is for ITM calls. He already added the net increase (1000) when calculating the diluted EPS

[@yuniorgalardy2781]

Thank you. Great video. This stuff can be very confusing but your explanation makes it easy to understand.

[@Edspira]

Awesome! I'm really happy that these videos are helping you. My ultimate goal is to cover all topics that you would find on the CPA exam, so many more videos are to come!

[@stanleychan4927]

great job, love your videos, i have been learning a lot, most appreciated

[@Edspira]

+stanley chan No problem, I'm glad things are going well! Best wishes

[@JPtheKid15]

so when do we do the compensation expense? Just for RSU's?

[@felixdechamboux1199]

Hello @Edspira, thanks for the video. Though I don't understand why the shortfall is added to the denominator, could you explain That ?

[@pritamsaha3869]

Can you please explain how do you get 3.87 as 120000/40000 is 3 ?

[@luisdelatorre9034]

Thank you so much for these videos they have helped tremendously!

[@shadeemozafari3800]

great video!!! thank you so much for uploading this and all your videos! you forgot one crucial point that the short cut method you used can only be used if the exercise price is less than the market price

[@bamesjond7495]

Right, but in reality why would someone exercise a stock option to purchase something above FMV.

[@avihariyani5862]

🔥👌🏼no words

[@Edspira]

😀

[@arshiashahlaie5618]

thank you man... you saved me..

[@reemalghamdi4093]

thank you that's really help, what about the reverse treasury stock method ?

[@miltonvilleda1809]

thank you for this video, great explanation!

[@arpitkadyan]

hi what if the options are given for a service condition of more than 1 year,say 2 or 3 years What will be the number of potential equity shares in the 1st year? I read it somewhere that in the 1 year the expected excercise price to be recieved has to be added to unamortised option cost and then the combined amount is divided by the market price.

[@RaphRoel]

Great video! Thanks

[@prod.skarrr]

4000 shares is considered as treasury stock and 1000 as outstanding???

[@elsancambridge5541]

Hi can u explain to me once again why exactly 1000 is in denominator Why we are minusing (5000-4000) May I knwo the exact reason? I didn't understood that part.

[@flake8382]

Hey champ. The 4,000 share amount is the amount that can be REPURCHASED, on the open second-hand market, at the currently observed trading price of $15, given that we only receive the exercise value of the options, $12ea: 5,000 call options * $12 exercise price = $60,000 received. But at the current observed open-market price, can only purchase: $60,000 / $15 per share = 4,000 shares. We are short 1,000 shares to provide to our options holders. To make good on the 1000 shares we owe, we must purchase them. The Diluted EPS shows the reduction in Basic EPS if this were to happen. Diluted EPS is thus full disclosure for how far a shareholders earnings can be eroded after factoring all options/warrants or other methods of obtaining equity by legal right at the end of the period.

[@一点一滴学英文]

thank you for sharing !

[@Edspira]

No problem!

[@juanvictorfernandez3748]

A taxi service with a Ferrari :)

[@eljangoolak]

isn't each option contract worth 100 shares? why are we considering each option to be 1 share? I don't understand the logic.

[@flake8382]

Options sold on exchanges that you may be familiar with often bundle in parcels of 100. This isn't exactly required though. Consider that if I were to run a private taxi business with my Ferrari - who can I sell options to in 100 share parcels? Not a lot of buyers want to commit to 100 for a small business. In a private equity transaction or over-the-counter offer, options can be any volume, not just 100 quantity parcels.