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
