Description
Proportionate Ownership, Market Value, Book Value, EPS
DILUTION
? It occurs mostly in cases where a firm plans to
sell its securities.
? It can be in terms of: ? Proportionate Ownership ? Market Value ? Book Value ? Earning Per Share
Proportionate Ownership
? Ex. Ramesh owns 10,000 shares of Bharat
International which has 100,000 outstanding shares. ? Ramesh has a claim to 10 percent of income and assets of firm. ? With issuing of 100,000 new equity shares, his ownership stake will drop to 5 percent (10,000/2,000,000). ? Can be avoided by rights issue which enable shareholder to maintain proportionate ownership.
Market Value, Book Value, EPS
Consider an example of Amit Steel: ? 10 million outstanding shares, book value of Rs 20 per share or Rs 200 million, selling for Rs 10 per share so market value is Rs 100 million, net income is Rs 16 million. ? EPS is 16/10= Rs 1.6, Return on Equity is 1.6/20= 8 % Price Earning Ratio of 10/1.6= 6.67, assume 100 shareholders each owns 100,000 shares. ? Planning to expand capacity. Expansion cost Rs 50 million. Issue of 5 million shares so total outstanding shares 15 million.
? ROE expected to be the same, net income
? ? ?
?
increased by .08*50 million= 4 million so total net income is 20 million. New EPS is 20/15= Rs 1.33, down from Rs 1.6. If P-E ratio is same i.e. 6.67, new market price per share will be Earning*P-E ratio = Rs 8.3. Book value per share, from ROE is, 1.33/.08= Rs 16.6. Each shareholder’s proportionate ownership will drop to 100,000/15,000,000= 0.67 % from 1 percent previously.
doc_576608486.ppt
Proportionate Ownership, Market Value, Book Value, EPS
DILUTION
? It occurs mostly in cases where a firm plans to
sell its securities.
? It can be in terms of: ? Proportionate Ownership ? Market Value ? Book Value ? Earning Per Share
Proportionate Ownership
? Ex. Ramesh owns 10,000 shares of Bharat
International which has 100,000 outstanding shares. ? Ramesh has a claim to 10 percent of income and assets of firm. ? With issuing of 100,000 new equity shares, his ownership stake will drop to 5 percent (10,000/2,000,000). ? Can be avoided by rights issue which enable shareholder to maintain proportionate ownership.
Market Value, Book Value, EPS
Consider an example of Amit Steel: ? 10 million outstanding shares, book value of Rs 20 per share or Rs 200 million, selling for Rs 10 per share so market value is Rs 100 million, net income is Rs 16 million. ? EPS is 16/10= Rs 1.6, Return on Equity is 1.6/20= 8 % Price Earning Ratio of 10/1.6= 6.67, assume 100 shareholders each owns 100,000 shares. ? Planning to expand capacity. Expansion cost Rs 50 million. Issue of 5 million shares so total outstanding shares 15 million.
? ROE expected to be the same, net income
? ? ?
?
increased by .08*50 million= 4 million so total net income is 20 million. New EPS is 20/15= Rs 1.33, down from Rs 1.6. If P-E ratio is same i.e. 6.67, new market price per share will be Earning*P-E ratio = Rs 8.3. Book value per share, from ROE is, 1.33/.08= Rs 16.6. Each shareholder’s proportionate ownership will drop to 100,000/15,000,000= 0.67 % from 1 percent previously.
doc_576608486.ppt