Hi guys, I came across this kind of question in an interview and want to know what is the answer for this. How the P/B ratio will evolve after raising equity ?
Thanks!
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Ignoring the effects of "signaling" which comes from management issuing equity, the P/B shouldn't change. The P represents market value, which does not increase when you issue equity (just split the prior market value more ways), and the Book Value of equity won't change as the fundamental "Net Asset Value" of the business has not changed by simply raising cash (i.e. no incremental profits are generate from the underlying business by simply raising cash in the capital markets).
dumb question but isn't cash considered a current asset? so wouldn't it technically increase book value which is (to my understanding) assets minus liabilities?
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Don't think the other answers are right... P/B should move closer to 1. Imagine you issued 10,000,000,000,000,000 new shares at $100 each (some bullshitly large amount relative to the market cap). You could see how cash on balance sheet would roughly equal the newly issued market cap. So whether P/B is above 1 or below 1 it should move toward 1 after accounting for the new cash on the balance sheet.
not op so sorry for haunting this post but just curious-- would the price itself change though if the fundamentals of the company stay the same regardless of equity raising (assuming no signaling)? so then wouldn't that just create a ton of cash, increase book value, and decrease p/b? I can see how it makes assets over stock holders equity ratio go closer to 1, but i don't see how this affects p/b.
Moving from the eagle eye view to the single instance view - one share gets issued (among the bazillion others) at $100. Now there is more cash on balance sheet of $100. So price is $100 and incremental book is $100. 100:100 = 1.
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