Ownership is a pie. You start by owning 100% of it. It is divided into 20 million slices. They’re there; you just can’t see ‘em. Each is a share of ownership in whatever.com. One day, the CEO of whatever.com decided she wanted to buy her hated competitor, something.com for two million shares. Then she wanted to buy her marketing vendor, sellmybuttoff.com for a million shares.
Her stock had been trading at $12 a share for a total market valuation of $240 million. That's 12 times 20 million. But then, after printing three million more shares to buy her competitors, she now has 23 million slices of pie. And yes, that’s how it works. Companies can essentially just go to the xerox machine and print shares of their own stock that they didn’t formerly own.
But now she has 23 million shares outstanding, not 20 million.
So at $12 a share, the stock market is valuing her company at a meaningfully higher price; 12 times 23 million is 276 million. It’s saying that the value of the three million share dilution she took in buying something.com and sellmybuttoff.com was the difference between 276 million and 240 million…or 36 million bucks.
But say the market value stays flat at $240 million. Now, with 23,000,000 shares, the stock is only worth $10.43 a share, instead of the previous $12 a share. In other words, shares have been diluted…each share of whatever.com is no longer worth as much as it used to be. That pie isn’t looking quite as appetizing now.
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Finance: What is Dilution?77 Views
finance a la shmoop. what is dilution? ownership is a pie.
here's 100% of pie. it's divided into 20 million slices, there there you just [man holds pie]
can't see them. each is a share of ownership in the company whatever.com
well one day the CEO of whatever.com decided she wanted to buy her hated
competitor something.com for 2 million shares. then she wanted to buy her
marketing vendor sell my butt off.com for a million shares. well her stock had
been trading at 12 bucks a share for a total market valuation of 240 million
dollars .see we get that 12 times 20 million. but then after printing 3 [equation]
million more shares to buy her competitors,
well she now has 23 million slices of pie .and yes that's how it works!
companies can essentially just go to the Xerox machine and print shares of their
own stock, that they didn't formerly own. but now she has 23 million shares [printer prints shares]
outstanding and not 20 million. so at $12 a share the stock market is valuing her
company at a meaningfully higher price. 12 times 23 million is 276 million. it's
saying that the value of the three million share dilutions she took in
buying something dot-com and Sell my butt off.com [woman waves to camera]
was the difference between the 276 million in the 240 million or 36 million
bucks. but let's say the market value had stayed flat at 240 million. well now with
23 million shares out the stock is only worth 10 dollars and 43 cents a share,
instead of the previous $12 a share. in other words shares have been diluted
each share of whatever com is no longer worth as much as it used to be. that pie
isn't looking quite as appetizing now is it? [man frowns in kitchen wearing apron]
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