Treasury stock method
Definition · Level 10 · Valuation
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How options enter diluted EPS: the money paid on exercise is assumed to buy back shares at the average price, so only the net new shares are counted.
Example
10M options struck at $10, average price $20: they buy back 5M shares, so 5M net new shares.
Where Tradecraft teaches it
Level 10 · Valuation, in the lesson “Per-share numbers: EPS and dilution”: Basic and diluted earnings per share, the treasury stock method, and what dilution does to each share’s slice.
Related terms
- Basic vs diluted EPSProfit per weighted-average share outstanding, versus the same figure counting shares that options, restricted stock units, warrants and…
- DilutionGrowth in the share count from new issues, option exercise, share awards to staff or bond conversion, which shrinks each existing holder’s slice of…
- EPSEarnings per share: net income (after preferred dividends) ÷ weighted-average shares outstanding.
- Preferred stockShares that pay a fixed dividend before ordinary shareholders get anything, and rank ahead of them if the company fails.
- 10-K / 10-Q / 8-KFilings with the US Securities and Exchange Commission: the audited annual report, the unaudited quarterly report, and the current report for…
- Accretive buybackA share repurchase that raises earnings per share: the earnings yield of the shares bought (EPS ÷ price) beats the after-tax cost of the cash used.