Answer: decrease the number of shares outstanding by the number of unvested shares awarded when computing diluted EPS.

**Correct Approach:** Option C is the most appropriate method because: - **Treasury Stock Method**: The treasury stock method used for diluted EPS calculations properly accounts for the dilutive effect of share-based awards by assuming the proceeds from exercise are used to repurchase shares at the average market price - **Forward-Looking Dilution**: This method captures the potential dilution from future share-based awards that are expected to be exercised - **Comprehensive Approach**: It considers all potential dilutive securities, not just those currently outstanding **Why Other Options Are Incorrect:** - Option A ignores the economic reality that future awards represent a claim on company value - Option B incorrectly treats share-based compensation as a cash expense when it's a non-cash item that doesn't affect free cash flow directly

Author: LeetQuiz Editorial Team