What is the treasury stock method? Give an example of TSM? What are the different types of dilutive securities?

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Accepted Answer

The treasury stock method is used to calculate the potential dilution of stock options and warrants. It assumes that the proceeds from the exercise of options and warrants are used to buy back shares at the average market price.

TSM calculates the dilutive effect of stock options and warrants
It assumes that the proceeds from the exercise of options and warrants are used to buy back shares at the average market price
The difference between the number of shares issued and the number of shares repurchased is added to the denominator of the earnings per share calculation
Example: If a company has 1,000 outstanding shares and 100 options exercisable at $10 per share, the TSM assumes that the company will receive $10,000 from the exercise of options and will use that money to buy back 1,000 / $10 = 100 shares
Types of dilutive securities include stock options, warrants, convertible debt, and convertible preferred stock

What is the treasury stock method? Give an example of TSM? What are the different types of dilutive securities?

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