Fully diluted shares include the dilutive effect of which securities?

• A. Stock options only
• B. Stock options and debt
• C. Stock options, warrants, convertible debt, and convertible preferred stock
• D. Only common shares

Answer: (C)

Fully diluted shares reflect all potential common shares that could exist if every dilutive security were exercised or converted. This includes stock options and warrants, because exercising them creates new common shares. It also includes convertible debt and convertible preferred stock, since they can be converted into common shares and thus increase the number of shares outstanding. Non-convertible debt doesn’t add shares to the count, though it can affect earnings per share through interest expense. So the dilutive set comprises stock options, warrants, convertible debt, and convertible preferred stock.