Fully diluted shares include which of the following?

Fully diluted shares include which of the following?

• A. Basic shares plus the dilutive effect of stock options and other dilutive securities
• B. Only basic shares
• C. Only cash equivalents
• D. Only warrants

Answer: (A)

Fully diluted shares tell you how many common shares would exist if all potential dilutive securities were exercised or converted. The key idea is to start with basic shares and then add the dilutive impact from stock options, warrants, and other convertible securities. For options and warrants, the treasury stock method is often used to estimate how many new shares would actually come into existence; for convertible securities, the if-converted method estimates how many shares would exist if they were converted. Some securities can be anti-dilutive and are then excluded from the diluted count, and cash equivalents are not shares and do not affect the share count. Therefore, the correct description is basic shares plus the dilutive effect of stock options and other dilutive securities. The other options miss these dilutive components.

Fully diluted shares tell you how many common shares would exist if all potential dilutive securities were exercised or converted. The key idea is to start with basic shares and then add the dilutive impact from stock options, warrants, and other convertible securities. For options and warrants, the treasury stock method is often used to estimate how many new shares would actually come into existence; for convertible securities, the if-converted method estimates how many shares would exist if they were converted. Some securities can be anti-dilutive and are then excluded from the diluted count, and cash equivalents are not shares and do not affect the share count. Therefore, the correct description is basic shares plus the dilutive effect of stock options and other dilutive securities. The other options miss these dilutive components.