dilute

Examples of dilute in the following topics:

• Calculating Diluted Earnings per Share

  • Diluted earnings per share (EPS) takes the basic EPS formula and accounts for the effect of dilutive shares on earnings.
  • Diluted Earnings Per Share (diluted EPS) is a company's earnings per share (EPS) calculated using fully diluted common shares outstanding (i.e. which includes the impact of instruments such as stock option grants and convertible bonds).
  • Fully diluted common shares consider securities with features that will increase the number of common shares outstanding and reduce (dilute) earnings per share.
  • Diluted earnings per share includes shares of common stock from dilutive securities, such as convertible debt or stock options, in its calculation.
  • Explain why a company would calculate diluted earning per share for its stock

• Earnings per Share

  • Diluted Earnings Per Share (diluted EPS) is a company's earnings per share (EPS) calculated using fully diluted outstanding shares (i.e. including the impact of stock option grants and convertible bonds).
  • To find diluted EPS, basic EPS is first calculated for each of the categories on the income statement.
  • Then each of the dilutive securities are ranked based on their effects, from most dilutive to least dilutive and antidilutive.
  • Calculations of diluted EPS vary.
  • This is adjusted for dilutive shares.

• Seasoned Equity Offering

  • The new shares dilute the value of the existing shares, and this is understandably, typically not looked upon kindly by those who own shares before the dilution.
  • In theory, this dilution should correspond directly to a drop in the share price such that the market capitalization of the company remains the same.
  • The sale of the shares does not benefit the company, and, more importantly, is not dilutive.
  • The dilution of the shares outstanding should theoretically be met with a corresponding drop in share price.

• Overview of Convertible Securities

  • Moreover, in exchange for the benefit of reduced interest payments, the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares.
  • Convertible securities also bring with them the risk of diluting control of the company and forced conversion, which occurs when the price of the stock is higher than the amount it would be if the bond were redeemed.

• Purchasing New Shares

  • In this way, existing shareholders can maintain their proportional ownership of the company, preventing stock dilution.

• Control and Preemption

  • The incentive to exercise this option is based on the desire to protect individual ownership or stake in a company from dilution.

• Long-Term Debt

  • Long-term debt is a means of financing that allows firms access to capital without diluting equity; capital & interest is paid off over time.

• Overview of Warrants

  • Warrants issued by the company itself are dilutive.
  • Because of the dilutive nature of warrants, their issuance can lead to a decrease in stock value and loss of voting control.

• Types of Transactions

  • However, economic dilution must prevail towards accounting dilution in the decision making process.

• Long-Term vs. Short-Term Financing

  • However, it does result in a dilution of share ownership, control and earnings.
  • Many times, capital notes are issued in connection with a debt-for-equity swap restructuring: instead of issuing the shares (that replace debt) in the present, the company gives creditors convertible securities – capital notes – so the dilution will occur later.