When calculating diluted shares, which items contribute to net new shares?

When calculating diluted shares, which items contribute to net new shares?

• A. Net new shares from options; Net new shares from RSUs.
• B. Net new shares from debt financing.
• C. Net new shares from stock splits.
• D. Net new shares from dividends.

Answer: (A)

Diluted shares reflect the number of shares that would exist if all potentially issuable securities were exercised or converted. The only items that create new shares in this sense are options and RSUs. When options are exercised, new shares are issued (and, under the treasury stock method, some of those shares are offset by shares the company can repurchase with the exercise proceeds), leaving a net increase. RSUs vest into common shares, also adding to the share count. Debt financing would only add shares if there were convertible debt, which isn’t stated here; stock splits simply reclassify shares without creating incremental diluted shares, and dividends don’t create new shares at all. Therefore, net new shares come from options and RSUs.

Diluted shares reflect the number of shares that would exist if all potentially issuable securities were exercised or converted. The only items that create new shares in this sense are options and RSUs. When options are exercised, new shares are issued (and, under the treasury stock method, some of those shares are offset by shares the company can repurchase with the exercise proceeds), leaving a net increase. RSUs vest into common shares, also adding to the share count. Debt financing would only add shares if there were convertible debt, which isn’t stated here; stock splits simply reclassify shares without creating incremental diluted shares, and dividends don’t create new shares at all. Therefore, net new shares come from options and RSUs.