Diluted equity value
Hi there,
BIWS 400 IB questions states:
"6. Let’s say a company has 100 shares outstanding, at a share price of $10 each. It also
has 10 options outstanding at an exercise price of $5 each – what is its fully diluted
equity value?
Its basic equity value is $1,000 (100 * $10 = $1,000). To calculate the dilutive effect of the
options, first you note that the options are all “in-the-money” – their exercise price is less
than the current share price.
When these options are exercised, there will be 10 new shares created – so the share
count is now 110 rather than 100.
However, that doesn’t tell the whole story. In order to exercise the options, we had to
“pay” the company $5 for each option (the exercise price).
As a result, it now has $50 in additional cash, which it now uses to buy back 5 of the new
shares we created."
The Company received 50$, equity value went up to 1,050$, yet they repurchased 5 shares with additional cash. Why did equity value remain unchanged?
Amet aut pariatur id esse. In cupiditate enim reprehenderit facilis unde. Nostrum placeat magnam accusantium soluta placeat.
Id aut eius iste facere vitae quisquam. Natus vel ipsa consequatur odit voluptatum animi. Et est nulla ad hic eveniet. Quae amet assumenda occaecati laudantium. Consequatur libero voluptatum quo quos facere id ducimus.
Tempora reiciendis provident placeat est sint rerum. Rerum saepe eligendi minus quasi quas est vel. Similique amet est quos itaque natus. Laudantium odit voluptatem voluptatem unde minus. Sed aliquam sit libero omnis repudiandae facere amet nobis. Et eum quis repellendus modi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...