What are Fully Diluted Shares?

Fully diluted shares represent the total number of common shares that would be outstanding and available to trade on the open market if all possible sources of conversion - such as convertible bonds, warrants, 澳洲幸运5官方开奖结果体彩网:employee stock options, and others - are exercised. Fully diluted shares include not only those ♏currently issued but also all that could be created through conversions. 

Companies use the fully diluted share count when calculating 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS). By increasing the number of shares in this calculation, fully diluted shares lower the 🃏EPS, as the same amount of earnings is now spread across a larger number of 𓂃shares.

Understanding Fully Diluted Shares

The number of fully diluted shares directly affects the EPS of a company, a key metric used to assess relative value and profitability. EPS is calculated by dividing net income (after 澳洲幸运5官方开奖结果体彩网:preferred dividends) by the weighted average num𓂃ber of common shares outstanding. The weighted average is typically calculated as:

(beginning period balance + ending period balance) / 2

If a company increases earnings per common share, it is generally considered more valuable, which may lead to a ris🍸e in its publicly traded share price. As the number of outstanding shares plays a key role in the EPS calculation, it’s important to be aware of any potential dilution that can reduce the EPS.

Factoring in Fully Diluted Shares

Assume that ABC Corporation (ABC) generates $10 million in 澳洲幸运5官方开奖结果体彩网:net income and pays preferred shareholders a total of $2 million in dividends. This leaves $8 million available to common shareholders. If the firm’s weighted average of common shares outstan♌ding totals 1 million, the EPS will be $8.00 per share:

$8 million / 1 million shares = $8 per share

This $8.00 EPS is referred to as "basic" because the total is not adjusted for dilution.

Full dilution assumes that all convertible securities, such as stock options, convertible bonds, or warrants, are exercised and converted into common shares. This increases the number of shares and, consequently, reduces the earnings available per each share. Since EPS is a key measure of a company’s value and profitability, it is important for an investor to review basic EPS as well as fu🌱lly diluted EPS.

Example of Fully Diluted Shares

Several types of securities can be converted into common stock, including 澳洲幸运5官方开奖结果体彩网:convertible bonds, 澳洲幸运5官方开奖结果体彩网:convertible preferred stock, 澳洲幸运5官方开奖结果体彩网:employee stock options, rights, and warrants.

Assume that the same ABC company, with 1 million outstanding shares, issues 100,000 shares in stock options to employees to reward them for strong performance. The firm has convertible bonds outstanding that allow bondholders to🔥 convert their securities into a total of 200,000 shares of common stock. ABC also has convertible preferred stock outstanding and those shares can be converted into 200,000 shares of common stock as well.

Full dilution assumes that all 500,000 additional common stock shares are issued, which increases the common shares outstanding to 1.5 million. Applying the $8 million in earnings to common shareholders, fully diluted EPS will now only be ($8 million / 1.5 million shares) or $5.33 per share, significantly  lower than the basic EPS of $8.00 per share.