When options are exercised in the example of fully diluted shares, what happens to the total share count?

• A. It decreases by the number of options exercised
• B. It remains the same
• C. It increases by the number of options exercised
• D. It increases by the number of options divided by two

Answer: (C)

When options are exercised, the total share count increases by the number of options exercised. This occurs because exercising an option typically means that the holder buys shares from the company, thus adding those shares to the total outstanding shares. Each option generally grants the holder the right to purchase one share of stock at a predetermined price, leading directly to an increase in the company's share count once those options are converted into actual shares.

In the context of fully diluted shares, which represent the total number of shares that would be outstanding if all potential sources of conversion, such as options and convertible securities, were exercised, the exercise of options directly contributes to this number. As a result, the total fully diluted share count reflects this increase, since it assumes all options have been exercised.

Other choices do not accurately represent what happens when options are exercised. For instance, a decrease in total share count would not align with the mechanics of how options operate, and stating that the share count remains the same would ignore the impact of converting options into shares. Additionally, suggesting an increase divided by two does not reflect standard practice regarding share conversion.