This workout asks us to calculate the equity value We've got a share price and we've got a number of shares outstanding We also have some stock options, so we'll need to calculate the diluted shares outstanding We've got three methods to do this and they should all get us to the same answer So we start off with the option intrinsic value method This says that my employees are going to hand over 5 of cash But they're going to get back a share worth 7.5. So they've got themselves some free value there, that free value is 2.5 Now we need to then multiple that up by the number of options And the new options have value of 2,500 The current market cap (the basic market cap) is your 10,000 shares times by the share price I can now add those two together to get to my diluted equity value, 77,500 Let's use the treasury method to try get to the same answer we start by calculating the cash raised by the options exercised What this means is that when your employees exercise your options, they need to hand over 5 for every option There are a 1,000 options in total, so the employees handover 5,000 The company can now use that 5,000 to go out to the market to try and buy some real shares to support the issue How much do they have to buy those shares at?Well the share price is 7.5 So the company manages to buy back 666.7 real shares and hands them to the employees The employees are not very happy about this, they're like "Hang on, the number of shares that need to be issued are actually a 1,000. Why are you giving me 666.7?" So the company will need to create the difference 333.3 and that is the dilutive effect, the new shares So my diluted shares outstanding is the 333.3 add that onto the 10,000 that existed before hand. And I've now got my dilutive shares outstanding 10,333 I now multiply that by the share price to get the diluted equity value And that is 77,500 Exactly the same as the option intrinsic value methodology The treasury method can be done much quicker, so let's use the quick way I'm going to use the formula and formula says, take the number of options outstanding and multiply that by the maximum of zero and your share price minus the strike price, all divided by the share price again And that gives us the same, 333.3 net increase in the share count Great! I can add that onto the basic shares outstanding we had of 10,000 Multiply the dilutive shares outstanding, 10,333.3 by the 7.5 And it gets us the same diluted equity value So that treasury method (the quick way), that's going to be our favourite if we need to do some calculations in excel