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Finance: What is Dilution? 77 Views
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What is dilution? Dilution happens when a company’s outstanding shares increase, meaning that stockowners now own a smaller percentage of the company. This increase in shares happens because the company has either issued new shares, or options have been exercised.
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Transcript
- 00:00
finance a la shmoop. what is dilution? ownership is a pie.
- 00:08
here's 100% of pie. it's divided into 20 million slices, there there you just [man holds pie]
- 00:14
can't see them. each is a share of ownership in the company whatever.com
- 00:18
well one day the CEO of whatever.com decided she wanted to buy her hated
- 00:23
competitor something.com for 2 million shares. then she wanted to buy her
Full Transcript
- 00:28
marketing vendor sell my butt off.com for a million shares. well her stock had
- 00:32
been trading at 12 bucks a share for a total market valuation of 240 million
- 00:37
dollars .see we get that 12 times 20 million. but then after printing 3 [equation]
- 00:42
million more shares to buy her competitors,
- 00:45
well she now has 23 million slices of pie .and yes that's how it works!
- 00:49
companies can essentially just go to the Xerox machine and print shares of their
- 00:53
own stock, that they didn't formerly own. but now she has 23 million shares [printer prints shares]
- 00:57
outstanding and not 20 million. so at $12 a share the stock market is valuing her
- 01:02
company at a meaningfully higher price. 12 times 23 million is 276 million. it's
- 01:07
saying that the value of the three million share dilutions she took in
- 01:12
buying something dot-com and Sell my butt off.com [woman waves to camera]
- 01:16
was the difference between the 276 million in the 240 million or 36 million
- 01:21
bucks. but let's say the market value had stayed flat at 240 million. well now with
- 01:26
23 million shares out the stock is only worth 10 dollars and 43 cents a share,
- 01:30
instead of the previous $12 a share. in other words shares have been diluted
- 01:37
each share of whatever com is no longer worth as much as it used to be. that pie
- 01:42
isn't looking quite as appetizing now is it? [man frowns in kitchen wearing apron]
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