Treasury stock method (TSM)
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
The method for computing dilutive shares from in-the-money options under US GAAP: net new shares = n · (1 - K / barP), where n is options outstanding, K is weighted-average strike, and barP is the average market price over the period. Assumes proceeds from option exercise are used to repurchase shares at barP.
Treasury stock method (TSM) in plain English
Companies often give employees "stock options" — the right to buy shares later at a fixed price called the strike. If those options get used, new shares appear and everyone's slice of the pie shrinks a bit ("dilution"), so accountants estimate how many extra shares to count. The Treasury stock method assumes the company takes the cash employees pay to exercise and immediately buys back as many shares as that cash allows at the average market price, leaving only the NET new shares. The formula is net new shares = n · (1 - K / barP), where n is the number of options, K is the average strike price, and barP is the average market price — notice you only get extra shares when the strike K is below the market price barP (the options are worth using).
Also called: TSM
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