What is the fully diluted market capitalization given 100 options with a strike price of $5 and a current share price of $10?

What is the fully diluted market capitalization given 100 options with a strike price of $5 and a current share price of $10?

• A. $500
• B. $550
• C. $650
• D. $600

Answer: (D)

The concept being tested is how dilution from in-the-money options affects the value of equity. Fully diluted market capitalization accounts not just for existing shares, but also for the potential cash inflow from options being exercised. Here, imagine there are 10 shares outstanding at $10 each, so the current market cap is $100. There are 100 options with a strike price of $5; since the current price is $10, these options are in the money and would bring in $5 per option if exercised, totaling $500. Adding this potential exercise proceeds to the current market cap gives $100 + $500 = $600. So the fully diluted market capitalization is $600.

The concept being tested is how dilution from in-the-money options affects the value of equity. Fully diluted market capitalization accounts not just for existing shares, but also for the potential cash inflow from options being exercised.

Here, imagine there are 10 shares outstanding at $10 each, so the current market cap is $100. There are 100 options with a strike price of $5; since the current price is $10, these options are in the money and would bring in $5 per option if exercised, totaling $500. Adding this potential exercise proceeds to the current market cap gives $100 + $500 = $600. So the fully diluted market capitalization is $600.