What does the treasury method assume about proceeds from in-the-money options?

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Multiple Choice

What does the treasury method assume about proceeds from in-the-money options?

Explanation:
Under the treasury method, when options are in the money, you assume they are exercised and the company receives cash equal to the exercise price times the number of options. That cash is then used to buy back shares at the current market price. The result is the net increase in shares equals the number of options exercised minus the shares repurchased with those proceeds. This approach captures how proceeds from option exercises can offset dilution by reducing the net new shares outstanding. So, the proceeds aren’t kept as cash, used to issue new shares, or used to pay debt; they’re used to buy back shares to offset the additional shares created by the option exercise.

Under the treasury method, when options are in the money, you assume they are exercised and the company receives cash equal to the exercise price times the number of options. That cash is then used to buy back shares at the current market price. The result is the net increase in shares equals the number of options exercised minus the shares repurchased with those proceeds. This approach captures how proceeds from option exercises can offset dilution by reducing the net new shares outstanding.

So, the proceeds aren’t kept as cash, used to issue new shares, or used to pay debt; they’re used to buy back shares to offset the additional shares created by the option exercise.

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