Which statement best describes diluted shares outstanding?

Which statement best describes diluted shares outstanding?

• A. Diluted shares equal basic shares plus all outstanding options.
• B. Diluted shares only include cash-settled awards.
• C. Diluted shares equal basic shares plus the net dilutive effect from in-the-money options and RSUs.
• D. Diluted shares exclude RSUs.

Answer: (C)

Diluted shares outstanding reflect the number of shares that would be outstanding if all potential common shares that could dilute earnings per share were exercised or converted. The best description is to take basic shares and add the net dilutive impact from instruments that could actually dilute, specifically options and RSUs that are in the money. For options, you apply the treasury stock method: assume holders exercise, the proceeds are used to buy back shares, and the resulting incremental shares are added to the count. Only options that are in the money (dilutive) are included. For RSUs, once they vest and convert to shares, they increase the share count, so they are included in diluted shares. Cash-settled awards do not create new shares, so they do not dilute and are not included. That’s why the statement describing diluted shares as basic shares plus the net dilutive effect from in-the-money options and RSUs is the correct one.

Diluted shares outstanding reflect the number of shares that would be outstanding if all potential common shares that could dilute earnings per share were exercised or converted. The best description is to take basic shares and add the net dilutive impact from instruments that could actually dilute, specifically options and RSUs that are in the money.

For options, you apply the treasury stock method: assume holders exercise, the proceeds are used to buy back shares, and the resulting incremental shares are added to the count. Only options that are in the money (dilutive) are included. For RSUs, once they vest and convert to shares, they increase the share count, so they are included in diluted shares. Cash-settled awards do not create new shares, so they do not dilute and are not included.

That’s why the statement describing diluted shares as basic shares plus the net dilutive effect from in-the-money options and RSUs is the correct one.