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?
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