Wayne, I'm double checking on the calculation of Fully diluted EPS. I want to be sure when the accounting rules changed from Primary and Fully Diluted to Basic and Fully Diluted that there were no changes in how to calculate Fully Diluted.
One reason that the shares don't add up in the Microsoft example, is that you would want to reduce the option shares added to the calculation by whatever cash is received from the exercise and also by the tax credit received. For example, if there were 1000 options granted (in the money for convenience) and the exercise price is $20 then the company will receive $20,000 upon the exercise of the shares. If the market price of the stock is $100 when the calculation is performed, that $20,000 received from the exercise would buy back 200 shares of stock. The EPS calculation would therefore reduce the number of options outstanding by 200 shares, so only 800 shares would go into the calculation of EPS.
Likewise, the tax credit received by the company from the employee exercising the shares figures into the calculation by using the amount from the tax credit as an offset to shares outstanding in the EPS calculation. In the above example with 1000 options outstanding, and the exercise price being $20, the company will be able to claim a $7,000 tax credit (assuming a 35% tax rate)upon the exercise of the shares. That $7k credit can be used to buy back 70 shares of stock so the number of shares used in the EPS calculation is further reduced by 70 shares.
Using cash received from the employee and the cash saved from the tax credit as a source of funds that will offset any repurchasing of shares in the open market reduces the number of shares in the fully diluted EPS calculation.
Regards
Edit: My source tells me that just in-the-money options are used in the calculation. |
