When a company issues new shares, it raises equity from the revenue that the stock sale brings. The company may sell the new shares at a price equal to the earnings per share presale. If so, the company will gain enough equity to maintain the current earnings per share. Stock dilution will occur because each share will represent a smaller fraction of the company. But if the company sells stock at lower prices, earnings per share will drop, hurting longstanding shareholders' portfolios.
1. Multiply the number of new shares that the company issues by the price at which it sells them. For example, if a company with $200,000 of equity and 800 outstanding shares issues 200 new shares at $150 each, then calculate: 200 × $150 = $30,000.
2. Add the revenue from the sale to the company's existing equity: $30,000 + $200,000 = $230,000.
3. Add the number of original shares to the number of new shares that the company issues: 800 + 200 = 1,000.
4. Divide the company's total equity by the new number of outstanding shares: $230,000 ÷ 1,000 = $230. This is the diluted value for earnings per share after the new stock issue.
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