To calculate diluted shares, we need to look at the diluted instruments that a company has. In this example, we're gonna look at employee stock options and restricted share units. The adjustment that needs to be made to the share counts for both of these will use the treasury method to calculate the number of new shares created and how much diluted shares goes up. The calculation we use for the treasury method calculates their net increase in the share counts and it's calculated by taking the number of options outstanding times by the maximum of two things. Firstly, the maximum of zero or share price minus strike price over share price. Now that max that we've put in there that's the Excel function that you could use. Here we have an example of the treasury method. We have a footnote here looking at options. Looking at the labels on the left hand side we can see it starts with a number of options outstanding, January 1st, 2014. The labels then go granted exercise, forfeited or expired, and then eventually down to outstanding December 31st, 2014. If I'm trying to value a company maybe partway through 2015 then I want to look back at the most recent set of numbers. So we go into this footnote and it's the figure from December 31st, 2014 that we want. But I've now got three figures there. I've got the outstanding, vested or expected to vest, and I've got exercisable. The one that we want is the outstanding number. So from that outstanding number, we'll then grab the number of shares and we'll grab the weighted average exercise price. We'll also need the company's share price, let's say the company's share price is currently 117.16. And do remember, we generally use options outstanding rather than exercisable.

Let's put those numbers into our calculation. So our treasury method to find the net dilution or the net new shares created will be the number of options outstanding, 2,221,181, times by the maximum of zero, and the share price 117.16 minus the weighted average exercise price or stripe price, 108.01, all over the share price, again. Which then gets us the number of new shares that would need to be created being 173,470.5. Now, why do we have that zero in that little max function? Well, if the share price had been lower than the strike price, then what we'd have from this calculation here would be a negative number. We don't want the number of shares to go down. If the share price is lower than the stripe price, then the options would not be exercised. There would be no change in the share count. So we want the maximum of zero or a positive number.