In the treasury stock method, net dilution occurs only if the stock price exceeds the strike. Which statement is true?

In the treasury stock method, net dilution occurs only if the stock price exceeds the strike. Which statement is true?

• A. Net dilution is greater when price is below strike.
• B. Net dilution is zero when price equals strike.
• C. Net dilution is positive only when price > strike.
• D. Net dilution is independent of price.

Answer: (C)

In the treasury stock method, the amount of dilution depends on how the stock price compares to the option’s strike price. When options are exercised, cash equal to the number of options times the strike price is used to buy back shares at the current price. The net increase in shares outstanding is the number of options exercised minus the shares repurchased. Mathematically, net new shares = N − (N × strike) / price = N × (price − strike) / price. This is positive only if the market price is higher than the strike price. If price equals strike, the net new shares are zero, and if price is below strike, the net effect is negative (an anti-dilutive effect). Therefore, net dilution occurs only when the stock price exceeds the strike price.

In the treasury stock method, the amount of dilution depends on how the stock price compares to the option’s strike price. When options are exercised, cash equal to the number of options times the strike price is used to buy back shares at the current price. The net increase in shares outstanding is the number of options exercised minus the shares repurchased. Mathematically, net new shares = N − (N × strike) / price = N × (price − strike) / price. This is positive only if the market price is higher than the strike price. If price equals strike, the net new shares are zero, and if price is below strike, the net effect is negative (an anti-dilutive effect). Therefore, net dilution occurs only when the stock price exceeds the strike price.