The treasury stock method is an approach companies use to determine the amount of additional shares that could be generated from all outstanding options and in-the-money warrants. When calculating the company's diluted earnings per share (EPS), it would take into account these additional shares in the total number of shares outstanding. This method suggests that the money resulting from exercising these options and warrants will be used to repurchase the company's stock, which eventually becomes treasury stock.
The treasury stock method formula is as follows:
Additional Shares Outstanding = Shares from Options/Warrants Exercised - Repurchased Shares = Shares from Exercise - (Shares from Exercise x Average Exercise Share Price / Average Share Price for the Period) = Shares from Exercise x (1 - Average Exercise Share Price / Average Share Price for the Period)
