I'm trying to understand the nature of the cost of options.
Let me try an example here.
The company's stock is at $11.
The company awards, 1,000,000 options at a strike $10.
The company has 9,000,000 shares outstanding.
Upon exercise of the option the company gets $10,000,000 cash, and the shares outstanding goes to 10,000,000.
Prior to dilution the market cap should be $99,000,000. After dilution, the market cap should be $109,000,000 (because of the exercise money), assuming the business doesn't change significantly during the exercise.
That gives a value of $10.90 a share, or a loss of .10/share for the exercise.
The article takes this further by taking Black-Scholes valuations on the options based on time until exercise, etc. I'm trying to keep it simple for my own sanity, though.
Now, quarterly statements give earnings in "fully diluted shares outstanding." I have always assumed that meant shares outstanding plus any shares that could be reasonably created through options/warrants/etc.
If "fully diluted shares" includes options that might be exercised, then we also need to know the strike price (or average strike price) of those options, to effectually calculate the impact on earnings, because cash does come in from those exercises.
Is there anything I'm missing? Do I understand the term "fully diluted" correctly?
Thanks for the article,
Tom CF |
