Dilution Template
This dilution template helps you identify the impact of dilutive securities on the share price.
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Dilution can be caused due to a number of dilutive securitiesDilutive SecuritiesDilution can be caused due to a number of dilutive securities such as stock options, restricted and performance stock units, preferred stock, warrants, and such as stock optionsStock OptionA stock option is a contract between two parties which gives the buyer the right to buy or sell underlying stocks at a predetermined price and within a specified time period. A seller of the stock option is called an option writer, where the seller is paid a premium from the contract purchased by the stock option buyer., restricted and performance stock units, preferred stockCost of Preferred StockThe cost of preferred stock to a company is effectively the price it pays in return for the income it gets from issuing and selling the stock. They calculate the cost of preferred stock by dividing the annual preferred dividend by the market price per share., warrants, and convertible debtCost of DebtThe cost of debt is the return that a company provides to its debtholders and creditors. Cost of debt is used in WACC calculations for valuation analysis.. Dilution may cause the share price to decline because dilution reduces the company’s earnings per share (EPS)Earnings Per Share (EPS)Earnings per share (EPS) is a key metric used to determine the profit for the common shareholder's on a per share basis. Earnings per share measure each common share’s profit allocation in relation to the company’s total profit and can be calculated based on basic shares outstanding or fully diluted shares outstanding. The extent of decline depends on the percentage of dilution. Given basic shares outstanding, share price, and information of dilutive securities, we can calculate dilution using the treasury stock method, and use the diluted number of shares outstanding and the market capitalizationMarket CapitalizationMarket Capitalization (Market Cap) is the most recent market value of a company’s outstanding shares. Market Cap is equal to the current share price multiplied by the number of shares outstanding. The investing community often uses the market capitalization value to rank companies of the company to calculate its new share price.
Step 1: Calculate the diluted number of shares outstanding using the treasury stock method
Step 2: Calculate the diluted shares outstanding by adding the additional shares issued due to dilution to the basic shares outstanding
Step 3: Divide the market capitalization of the company by the diluted shares outstanding to arrive at the new share price of the company
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