Wednesday, May 14, 2008

The Treasury Stock Method

Here is another interview question I was asked in my last interview: 'How do you calculate equity value using the Treasury Stock Method (TSM)?'

______________________________________________________________________________________________________________


Let's go over the answer to this question.

This question relates specifically to one of the first steps of performing a Public Comparable Analysis. In this type of analysis the banker needs to Calculate Equity Value. There are typically two ways to do this.

  • Equity value = Share price x Shares outstanding

  • Treasury Stock Method, which also includes calculating options and their equivalents

Note: Only in-the-money options are used when performing the TSM calculation. For an option to be in-the-money, the option's strike price must be less than the current stock price. When performing this calculation you are also assuming that a rational investor will exercise their in-the-money option, allowing them to make the 'spread'.

Another assumption of the TSM is that the money the company makes by all holders exercising their in-the-money options will be used to buy back stock.

So how do you perform the actual calculation?


Steps to Calculate Equity Value Using the TSM



STEP 1 ) Options proceeds = Exercise price x Options outstanding

STEP 2 ) Shares repurchased = Options proceeds / Current stock price

STEP 3 ) Diluted shares outstanding = Basic shares + In-the-money options - Shares repurchased under TSM

STEP 4 ) Equity value = Diluted shares outstanding x Current stock price

Memorize these 4 basic steps to perform this calculation, know and understand the assumptions, and you will be a star in your interview when you are asked this question.

Here are some more links on this topic for your reference:

Wikipedia: Treasury Stock Explained

Investopedia: Treasury Stock Method

13 comments:

Albina N muro said...

Investment banking technical interview question using treasury stock method to calculate dilutive shares for valuation comparable company analysis. gold ira accounts

Eapen K C said...

Thank you. I have a doubt on STEP 3, When the Company repurchases shares using in-the-money proceeds, are they not purchasing from the total outstanding shares in the market. If yes how does it add to the total diluted shares outstanding. I might be wrong here but could you please let me know. Many thanks. Eapen(+918105159357)

Dr.Zack Martin said...

a

Robert Lima said...

Your blogs are easily accessible and quite enlightening so keep doing the amazing work guys.Cloud Bookkeeping

Dr.Zack Martin said...

These are actually wonderful some ideas in the blog. You have touched good quality points here. In whatever way continue writing.Forex Trading Strategies

Justin Bieber said...

The quality of your articles and contents is great.faxless payday loan

Chris Pratt said...

I even have been getting a lot of helpful and informative material in your web site.life insurance rates

John Erick said...

I was searching for many blogs site and now finally I have got this cool place with lots of information.life ins

Steven Buttler said...

Thanks for the entire information you have given here to impart knowledge amongst us?pay day loans

Chris Morris said...

You guys present there are performing an excellent job.Businessman

Albert jack said...

Great! We will be connecting to this enormous post on our site. Continue the good writing. Entrepreneur Mark Curry

Anonymous said...

Tks very much for your post.

Avoid surprises — interviews need preparation. Some questions come up time and time again — usually about you, your experience and the job itself. We've gathered together the most common questions so you can get your preparation off to a flying start.

You also find all interview questions at link at the end of this post.

Source: Download Ebook: Investment Club Accounting has never been easier. Discover a step-by-step process to running the accounts for your investment club:

Source: Download Ebook: Ultimate Guide To Job Interview Questions Answers:

Best rgs

mithila anderson said...

All types associated with touch options are ordered over the weekend after which traded during the actual week. Binary Trading Options The investor then has numerous chances throughout the actual week to earn (or lose) money in line with the closing position of the particular investment at the conclusion of the buying and selling day.