How do you calculate diluted shares with the treasury stock method?

The treasury stock method tells me how many extra shares options and warrants add to the share count. The idea is that if the options are in the money, holders exercise them, and the company uses the cash it receives to buy back shares at the current price. Only the net new shares count as dilution. Let me use numbers. Say the company has 100 million basic shares and the share price is $20. It also has 10 million options with a strike price of $10. The strike is below the share price, so the options are in the money and I assume all 10 million are exercised. The company receives 10 million times $10, which is $100 million. At $20 a share, that buys back 5 million shares. So the net new shares are 10 million minus 5 million, which is 5 million, and diluted shares are 105 million. If the strike were above $20, the options would be out of the money and I'd add nothing.

The treasury stock method tells me how many extra shares options and warrants add to the share count. The idea is that if the options are in the money, holders exercise them, and the company uses the cash it receives to buy back shares at the current price. Only the net new shares count as dilution. Let me use numbers. Say the company has 100 million basic shares and the share price is $20. It also has 10 million options with a strike price of $10. The strike is below the share price, so the options are in the money and I assume all 10 million are exercised. The company receives 10 million times $10, which is $100 million. At $20 a share, that buys back 5 million shares. So the net new shares are 10 million minus 5 million, which is 5 million, and diluted shares are 105 million. The shortcut is options times one minus the strike over the price. Here that's 10 million times one half, which is 5 million again. If the strike were above $20, the options would be out of the money and I'd add nothing. Three things I'd watch. I'd run it separately for each group of options, because each has its own strike. For a valuation I'd use the current share price, or the offer price in a takeover, which is usually higher and so adds more shares. Reported diluted earnings per share use the average price over the period instead. And convertible bonds aren't covered by this method. They use the if-converted method. It matters because equity value is the share price times diluted shares. Here that's $20 times 105 million, or $2.1 billion, against $2.0 billion on basic shares.