Diluted market cap & share price
Hello,
Capital IQ uses the TSM method to compute the diluted market cap but what is the point of using a diluted market cap when computing multiples? I mean, diluted market cap would always be greater than the "vanilla" market cap but, is that even a thing? I mean, wouldn’t there be a "correction" in the share price to reflect the dilution because the cake would still be the same size, i.e. the market cap would come back to it’s original "vanilla" value?
Example:
100 shares, $10 share price
20 options, strike price of 4$
Vanilla market cap: 100 x 10 = 1000
Proceeds from the exercise of the options: 20 x 4 = 80
New shares (former options) = 20
Shared bought back by the company = 80/10 = 8
Final number of shares = 100 + 20 - 8 = 112
Diluted market cap (CIQ) = 112 x 10 = 1120
But I think that very shortly after the market cap went up to 1120, it would go down to 1000 because the cake is not bigger. Thus, there would be a dilution and the new share price would be 1000/112 and not 1000/100 anymore
Shouldn’t we then compute our multiples based on a vanilla market cap?
This is something that always grinded my gears in how banks do their analyses. I think the underlying assumption is that whatever the current per share price is already factors in dilution from any options/buyback of proceeds therefrom and so you just multiply the per share price x diluted amount of shares. But I agree with you that it probably doesn't work that way all the time and you are actually overvaluing the company.
Thanks a lot for your answer that confirms what I was thinking
I’ll brainstorm on it with coworkers
But it looks that the fact that it’s already factored in is a bit "recursive", no? Let’s take the previous example where the share price was originally at 10$ If it’s already factored in, that would mean that there would not be a dilution upon exercice of the options and the share price woul not fall to 1000/112 = 8.93 which I find very unlikely since options have no rights whatsoever before they are exercised 😅
Why would TSM overvalue the company? That would assume, unless I'm missing something, that investors are broadly unaware of and not pricing in the existence of stock options and their dilutive effect.
According to CIQ :
IQ_MARKETCAP (vanilla) = nb_shares * close_price
IQ_MARKETCAP_OUT (diluted) = IQ_MARKETCAP + (close_price - strike)*nb_in_money_opt/close_price
So according to CIQ, we could have two MktCap. But in my opinion, the MktCap would not move as the cake is still the same, only the share price should be diluted and the new share price should be diluted because of the increase in shares
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