Fully Diluted Shares
Definition
Fully diluted shares outstanding is the share count including basic shares plus the net dilutive effect of all in-the-money securities that can convert into common stock: options and warrants (via the treasury stock method), RSUs, and convertible bonds or convertible preferred (via the if-converted method where dilutive).
For convertibles, the if-converted method adds the shares issued on conversion; when computing diluted EPS, the related interest expense (after tax) is added back to net income. In valuation practice, a convertible is treated as either debt or equity (shares) depending on whether it is in the money — not both.
Equity value should always be computed on fully diluted shares, since those claims are real and dilute existing shareholders.
Why interviewers ask
"Why do we use diluted rather than basic shares?" and combined TSM math questions are routine. The trap is double-counting a convertible as both debt in the EV bridge and shares in the count, or ignoring dilution entirely when computing equity value per share in a DCF.
Related terms
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