Dillution

Question 1

What is the difference between Basic Equity Value and Diluted Equity Value? What do they mean?

Answer 1

Common Shares Outstanding * Current Share Price

Diluted Shares Outstanding * Current Share Price

Question 2

A company has 100 shares outstanding, and its current share price is $10.00. It also has 10
options outstanding at an exercise price of $5.00 each. What is its Diluted Equity Value?

Answer 2

Basic Equity Value is 100 * $10.00 = $1,000

Option exercised so share count increases to 110

Uses cash to buyback shares so diluted share count is 105

Question 3

A company has 1 million shares outstanding, and its current share price is $100.00. It also has $10 million of convertible bonds, with a par value of $1,000 and a conversion price of $50.00.

What are its diluted shares outstanding and Diluted Equity Value?

Answer 3

convertible bonds are convertible into shares

convertible bonds will create $10 million / $50.00 = 200,000 new shares

diluted shares are 1.2 million

You don’t use the Treasury Stock Method with convertibles because the investors don’t pay the company to convert the bonds into shares; they paid for the bonds upon the first issuance.