In a scenario with 100 shares outstanding, price $10, and 10 options at an exercise price of $5, what is the fully diluted equity value?

• A. $1,000
• B. $1,050
• C. $1,100
• D. $1,150

Answer: (B)

When valuing fully diluted equity, we use the treasury stock method: assume all options are exercised and new shares are issued, but the cash raised from exercising those options is used to buy back shares at the current market price. Here, there are 10 options with an exercise price of 5 and the stock trades at 10. If all options are exercised, the company gains cash of 10 × 5 = 50. At the market price of 10, that cash can buy back 50 / 10 = 5 shares. So the net increase in shares is 10 exercised minus 5 bought back = 5 additional shares. The diluted share count becomes 100 + 5 = 105. Multiply by the current price to get the fully diluted equity value: 105 × 10 = 1,050. This is why the value is 1,050: it reflects the actual net new shares after the cash from exercise is used to repurchase shares.