Treasury stock method

• It assumes that the proceeds that a company receives from an in-the-money option exercise are used to repurchase common shares in the market at the average market price over the reporting period.
• No. increase in the shares outstanding = no. of shares from exercising the options – no. of shares repurchased
• Options and warrants are dilutive whenever their exercise price is less than the averaged stock price over the reporting period because of no adjustment to net income.
• To comply with GAAP, the treasury stock method must be used by a company when computing its diluted EPS.
  
  New shares = (average market price – exercise price) / average market price x no. of shares covered by options/warrants