Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksMedium
A company has 10 million shares of common stock outstanding and 2 million shares of convertible preferred stock. If all the convertible preferred stock were converted into common stock, the total number of common shares outstanding would be 12 million. What term describes the total number of common shares outstanding if all dilutive securities were converted?
- AFully Diluted Shares Outstanding
- BIssued Shares
- CTreasury Shares
- DAuthorized Shares
Show answer & explanationAnswer & explanation
Correct answer: A. Fully Diluted Shares Outstanding
Fully diluted shares outstanding represent the total number of common shares that would be outstanding if all convertible securities, such as convertible preferred stock or convertible bonds, and exercisable options and warrants were converted into common stock.
Why the other options are wrong
- B. Issued shares are shares that have been sold to investors.
- C. Treasury shares are shares that the company has repurchased from the open market.
- D. Authorized shares are the maximum number of shares a company is legally permitted to issue.
Fully Diluted Shares Outstanding
The total number of a company's common shares that would be outstanding if all convertible securities and exercisable options/warrants were converted or exercised into common stock.
- Includes all actual common shares outstanding.
- Adds shares from convertible preferred stock, convertible bonds.
- Adds shares from stock options and warrants.
- Used to calculate fully diluted Earnings Per Share (EPS).
Memory trick: Fully Diluted means 'all potential shares' are counted.