When investors exercise stock options, they gain a share in a company. If the company later issues new shares, it will dilute the investors' stake in the firm. The dilution may or may not hurt the older shareholders. They will lose voting power in the company, but they may care more about the value of their shares. Depending on the equity the firm gains from the new investment, the stock price may rise or fall, raising or dropping the older shares' worth.
1. Multiply the number of shares for the original option from the price that investors paid for them. For example, if investors paid $100 for each of 1,800 shares then calculate 1,800 × $100 = $180,000.
2. Multiply the number of shares that the firm offers during the dilution by the price new investors pay for them. If the new offering includes 500 shares priced at $80 each, then 500 × $80 = $40,000.
3. Add the last last two steps' sums together: $180,000 + $40,000 = $220,000. This is the firm's total equity from the shares.
4. Divide the equity by the total number of outstanding shares: $220,000 ÷ (1,800 + 500) = $95.65. This is the value of each share after dilution.
5. Multiply each share's value by the number of shares from the initial offering: $95.65 × 1,800 = $172,170. This is the original shares' new value, which has dropped after the dilution.
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