The value of common stock, unlike that of preferred stock, changes when a company issues new shares. The stock's value is inversely proportional to the number of outstanding shares, which the new stock offering increases. The new offering also brings new equity into the company. If it brings in sufficient equity, the stock retains its value, and the offering won't hurt the existing shareholders. If not, the company may gain its capital at the existing shareholders' expense.
1. Calculate the amount of equity that the original investors contributed to the company. This value is the product of the number of outstanding shares and the stock price during the original offering. For example, if investors bought 20,000 shares at $30 each, multiply 2,000 by $30 to get $600,000.
2. Multiply the new offering price by the number of additional shares that the company issues. For example, if the company issues 10,000 new shares at a reduced price of $20, multiply $20 by 10,000 to get $200,000.
3. Add the two sums together to find the company's total shareholder equity. $600,000 plus $200,000 is $800,000.
4. Divide this sum by the total number of existing shares. Dividing $800,000 by 30,000, which is the sum of 20,000 and 10,000, gives $26.67. This is the new value of each share of common stock.
5. Multiply this value by the number of shares in the portion of the common stock that you're analyzing. For example, if you're calculating the value of 100 of the shares, multiply $26.67 by 100 to get $2,667, the stock's value.
- Practical Financial Management; William Lasher
- Financial and Managerial Accounting; Belverd E. Needles, et. al.
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