Basic equity value is simply calculated by multiplying a company’s share price by the number of basic shares outstanding. The calculation of basic shares outstanding does not include the effect of dilution that may occur due to dilutive securities such as stock options, restricted and performance stock units, preferred stock, warrants, and convertible debt. The dilutive effect of these securities can be calculated using the treasury stock method. To calculate the diluted shares outstanding, add the additional number of shares created due to the dilutive effect of securities on the basic securities outstanding.
Since all in the money securities are paid off by the buyer during an acquisition, from a valuation perspective, diluted shares outstanding should be used when using equity value or calculating enterprise value as it more accurately determines the cost of acquiring a firm. Furthermore, once the buyer pays off these securities, they convert into additional shares for the buyer, further raising the acquisition cost of the company.