The Treasury Stock Method is a method used to calculate the number of shares a company could potentially issue by using the current stock price and market capitalization, taking into account the outstanding shares and the shares held as treasury stock. It is a way to estimate the dilution of earnings per share (EPS) that would occur if all of the company's outstanding options and warrants were exercised and all the treasury stock were sold.The formula for the Treasury Stock Method is: -Shares from Exercise of Options and Warrants + Treasury Stock = Total Additional SharesShares Outstanding - Total Additional Shares = Diluted Shares OutstandingNet Income / Diluted Shares Outstanding = Diluted Earnings Per Share (EPS)For example, let's say a company has 1,000 shares outstanding, 100 shares held in treasury stock and 100 shares available for options and warrants. The current stock price is $50 per share and the market capitalization is $50,000.The total additional shares would be 100 (from options and warrants) + 100 (treasury stock) = 200The diluted shares outstanding would be 1,000 - 200 = 800The diluted EPS would be calculated by dividing the net income by 800 shares.It's worth noting that the Treasury Stock Method is considered a theoretical calculation and it's not necessary that the options and warrants are exercised or the treasury stock is sold and thus the dilution of EPS may not happen.In summary, The Treasury Stock Method is a method used to estimate the dilution of earnings per share (EPS) that would occur if all of the company's outstanding options and warrants were exercised.
