Treasury stock method

How options are counted in diluted earnings per share: assume exercise, assume the proceeds buy shares back, and add only the net new shares.

Where you will meet it

Treasury stock method appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Work out earnings per share on a basic and a diluted basis
  CFA Level I · Financial Statement Analysis

  “Diluted earnings per share assumes that dilutive convertible securities and options were exercised: convertible preferred adds back its dividend and its shares, convertible debt adds back after-tax interest and its shares, and options add net new shares under the treasury stock method.”

• Explain how a financial statement model projects share-based compensation expense and share count, and how these feed into valuation
  CFA Level II · Financial Statement Analysis

  “For options, the treasury stock method adds shares equal to options multiplied by one minus exercise price over share price (the period's average price, for diluted EPS).”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with T · Glossary