In calculating diluted earnings per share, which item is included to reflect potential additional shares from options?

• A. Basic shares outstanding
• B. Net new shares from options
• C. Restricted stock units only
• D. Preferred shares

Answer: (B)

Diluted earnings per share captures all potential dilutive securities as if they were converted to common stock. For stock options, the adjustment uses the treasury stock method to determine the net increase in shares. You assume options are exercised, the cash proceeds are used to repurchase common shares at the average market price, and the remaining shares represent the net new shares from options. This net increment is added to the basic shares to form the diluted denominator.

That net new shares from options is the item that best reflects the potential additional shares from options. Basic shares outstanding are used for basic EPS, not diluted. Restricted stock units could dilute as well, but the question specifically focuses on the option-based adjustment. Preferred shares aren’t the standard dilutive instrument in this context unless they’re convertible.