I guess the question pertains to Level I curriculum Theoretically to calculate market capitalization we must account for in the money stock options for the share count. However I guess it is tedious, so my senior analyst in fixed income (sell side) takes fully diluted share count? Is that how you guys do it? Also if a company issues too many options then stock prices may decline to take into account dilution and hence market cap may remain same. So why not take basic share count?
Fully dilute share count already takes into account options and warrants “at the money.” You don’t need to make any further adjustments. Options and warrants that are out of the money are completely ignored. In otherwords, multiplying fully diluted shares by the current market price in order to derive true market capitalization is correct. Remember, in order to calculated the “net” effect of the exercise of in the money options (in order to produce the pro-form fully-diluted number) any options that are in the money would have been converted the number of underlying shares and the amount of cash received by the company from the strike price would have been used to purchase share at the then-current market price. Since, for in the money options, the amount of money the company gets when option holders exercise is less than the current market price of the stock (else, why would the holder exercise the option!), the company is always issuing net new shares since the amount of shares it issues is less than the amount it can repurchase. But the point is that the fully diluted share calculation is based off of near current market prices at the time of the balance sheet, so the “net” shares are then included in the fully diluted calculation. It would be pretty close to the true amount even at periods later than the balance sheet unless (1) tons of options have been issued and are in the money and (2) the share price has experienced an enormous run up since the balance sheet date of the fully diluted calculation. Since the calculation is made on a quarterly basis, just measure from the quarterly balance sheet date to the current date and see whether the stock has blown out the doors to determine whether you should bother recalculating fully-diluted shares with a new share price.
thanks for inputs. though i never said we need to adjust any further after fully diluted share count. my questions was if a firm issues too many options, in that case you will have arrive at a much higher marketcap, actually share price may go down when these options are vested. else a firm can increase its EV just by increasing its share count!