When a company issues new stock, its total shares fall into two categories. The original outstanding shares are those shares that the company issued to prior investors. A second set belongs to the new investors, who generally buy their shares an an inflated or deflated price. An issue of additional common shares is commonly called dilution. The number of original outstanding shares and its relationship with other factors determine whether stock dilution helps, hurts or has no effect of the outstanding shareholders' portfolios.
1. Divide the amount of equity that the company holds by its earnings per share post-dilution. For example, if shares each receive $200 after the dilution and the company has $280,000 of equity, divide $280,000 by $200, resulting in 1,400, the total number of issued shares.
2. Subtract the company's equity before the dilution from its equity after it. For example, if the company previously had $230,000 in equity, subtract $230,000 from $280,000, giving $50,000. This is the company's equity gain from the dilution.
3. Divide this equity rise by the issued stock price. For example, if the company issued the new stock at $80 per share, divide $50,000 by $80, giving 625. This is the number of new shares in the offering.
4. Subtract the number of shares from the offering from the total number of shares after it. Subtracting 625 from 1,400 gives 775. This is the number of outstanding shares before the dilution.
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