• Forecasting Shares Outstanding

    Basic shares outstanding can be estimated by taking the previous year’s average shares and adding share issued and subtracting share repurchases. The shares issued and shares repurchased are not averaged because they already represent averages that will span the year.

    To calculate diluted shares outstanding, use the treasury method. What it means is that the proceeds from an options exercised are used to reduce the number of outstanding shares at the market price.

    Let’s take an example:

    A company’s employees have options that allow them to buy 1,000 shares at an average price of $18. The company’s stock is currently trading at $20.

    Under the treasury method, a company will receive proceeds of 1,000 * $18 = $18,000 to issue 1,000 new shares. It will use those proceeds to repurchase $18,000/$20 = 900 shares. The net effect of the options exercise is an additional 100 shares of capital stock. This reduces the impact of dilution on EPS.

    Example: Cisco Shares Outstanding

    Step 1: Calculate the basic shares outstanding. This is simply the previous year’s shares plus issued shared minus shares repurchased.

    Step 2: Set up the table to calculate the dilutive securities. Restricted stock units can be found on page 69. Add a plug to reconcile the figures.

    Step 3: Calculate the dilutive effect of the options using the treasury method. Copy the options table from page 68 to the sheet. Using the weighted average strike price and the anticipated average stock price, determine what options are exercisable.

    Step 4: Link the net dilution effect from options to the summary table and straight-line the restricted stock.

    Step 5: Link the share numbers to the balance sheet.

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