Niles Company granted 12 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $4 per share on January 1, 2020, the grant date of the restricted stock award. When calculating diluted EPS at December 31, 2021, what will be the net increase in the weighted-average number of shares outstanding if the market price of the common shares averaged $4 per share during 2021?

The total compensation for the award is $48 million ($4 market price per share x 12 million shares). Because the stock award vests over three years, it is expensed as $16 million each year for three years. At the end of 2021, the second year, $32 million has been expensed and $16 million remains unexpensed, so $16 million would be the assumed proceeds in an EPS calculation. If the market price averages $4, the $16 million will buy back 4 million shares and we would add to the denominator of diluted EPS million common shares:

No adjustment to the numerator

12 million – 4* million = 8 million

*Assumed purchase of treasury shares

$16 million

÷ $4 (average market price)

4 million shares