If a company has 100 shares outstanding at $10 and 10 in-the-money options with $5 exercise price, what is the fully diluted equity value?

If a company has 100 shares outstanding at $10 and 10 in-the-money options with $5 exercise price, what is the fully diluted equity value?

• A. $1,000
• B. $1,100
• C. $1,050
• D. $1,500

Answer: (C)

The concept here is how in-the-money stock options influence fully diluted equity value. Start with the value of the existing equity: 100 shares priced at 10 each gives 1,000. Now consider the options. They have an exercise price of 5 and are in the money, so each option has intrinsic value of 10 − 5 = 5. With 10 options, the total intrinsic value added to equity is 10 × 5 = 50. Add that to the current equity value: 1,000 + 50 = 1,050. This reflects the additional value created if the options are exercised, before adjusting for any price impact from dilution. Note that another way some analyses handle fully diluted value is to assume all options are exercised and shares issued, which would yield 110 shares worth 10 each, or 1,100. The question’s approach uses the intrinsic value add method, giving 1,050.

The concept here is how in-the-money stock options influence fully diluted equity value. Start with the value of the existing equity: 100 shares priced at 10 each gives 1,000.

Now consider the options. They have an exercise price of 5 and are in the money, so each option has intrinsic value of 10 − 5 = 5. With 10 options, the total intrinsic value added to equity is 10 × 5 = 50.

Add that to the current equity value: 1,000 + 50 = 1,050. This reflects the additional value created if the options are exercised, before adjusting for any price impact from dilution.

Note that another way some analyses handle fully diluted value is to assume all options are exercised and shares issued, which would yield 110 shares worth 10 each, or 1,100. The question’s approach uses the intrinsic value add method, giving 1,050.