Under the Treasury Stock Method, when options are exercised, what happens to the cash from exercises?

Under the Treasury Stock Method, when options are exercised, what happens to the cash from exercises?

• A. The company issues new shares, increasing count.
• B. The exercise proceeds are added to cash reserves.
• C. The exercise proceeds are ignored.
• D. The company uses exercise proceeds to repurchase shares, resulting in a smaller net increase.

Answer: (D)

Under the Treasury Stock Method, the cash from exercised options is used to repurchase shares. When options are exercised, the company receives cash equal to the number of options times the exercise price. It then uses that cash to buy back shares on the open market at the current price. The net effect is a smaller increase in shares outstanding, equal to the number of options exercised minus the number of shares the company can repurchase with the exercise proceeds. This is why the diluted shares count is lower than simply adding all exercised shares. For example, if 1,000 options are exercised at $10 each, producing $10,000, and the market price is $12, the company can repurchase about 833 shares, leaving a net increase of 167 shares.

Under the Treasury Stock Method, the cash from exercised options is used to repurchase shares. When options are exercised, the company receives cash equal to the number of options times the exercise price. It then uses that cash to buy back shares on the open market at the current price. The net effect is a smaller increase in shares outstanding, equal to the number of options exercised minus the number of shares the company can repurchase with the exercise proceeds. This is why the diluted shares count is lower than simply adding all exercised shares. For example, if 1,000 options are exercised at $10 each, producing $10,000, and the market price is $12, the company can repurchase about 833 shares, leaving a net increase of 167 shares.