ShmoopTube

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finance a la shmoop. what is dilution? ownership is a pie.

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here's 100% of pie. it's divided into 20 million slices, there there you just [man holds pie]

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can't see them. each is a share of ownership in the company whatever.com

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well one day the CEO of whatever.com decided she wanted to buy her hated

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competitor something.com for 2 million shares. then she wanted to buy her

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marketing vendor sell my butt off.com for a million shares. well her stock had

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been trading at 12 bucks a share for a total market valuation of 240 million

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dollars .see we get that 12 times 20 million. but then after printing 3 [equation]

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million more shares to buy her competitors,

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well she now has 23 million slices of pie .and yes that's how it works!

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companies can essentially just go to the Xerox machine and print shares of their

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own stock, that they didn't formerly own. but now she has 23 million shares [printer prints shares]

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outstanding and not 20 million. so at $12 a share the stock market is valuing her

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company at a meaningfully higher price. 12 times 23 million is 276 million. it's

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saying that the value of the three million share dilutions she took in

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buying something dot-com and Sell my butt off.com [woman waves to camera]

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was the difference between the 276 million in the 240 million or 36 million

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bucks. but let's say the market value had stayed flat at 240 million. well now with

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23 million shares out the stock is only worth 10 dollars and 43 cents a share,

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instead of the previous $12 a share. in other words shares have been diluted

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each share of whatever com is no longer worth as much as it used to be. that pie

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isn't looking quite as appetizing now is it? [man frowns in kitchen wearing apron]

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