Method of calculating share price after capital increase

 Method of calculating share price after capital increase

To increase its capital, some of the companies in which it contributes may offer more shares for sale. Therefore, it is very normal to wonder about the method of calculating the share price after the capital increase.

In the event that the company in which you invested decides to raise capital by offering and selling more shares, this will often result in diluting the holdings of existing shareholders. Ostensibly, this action should cause the share price to drop. However, since the share price in the market depends on the expectations of the investors, the process of the company issuing new shares may be seen as positive for the share price. Sometimes it may be viewed negatively as well, as we mentioned earlier, and at other times it may be viewed in a negative and positive way together, depending on the time frame of each investor.

When new shares are issued, the result is often a dilution of the share and consequently a decrease in its value and price. But this is just one possible outcome.

Understanding the value of capital:

From a capitalization or market value point of view, the capital increase and the sale of more shares should not significantly change the value of the share. The shares coming out of the new issue result in cash equal to the value of those shares coming into the company. Consider a hypothetical company with a market capitalization of $100,000 and 1,000 shares. Each share is valued at $100. If the company sells 100 more shares, it will bring in $10,000. In this case, the value of the company would increase by $10,000 to $110,000 and the number of shares would increase to 1,100 while maintaining a value of $100 per share.

Method of calculating share price after capital increase:

Selling shares will dilute current earnings per share, which is a metric investors often use to gauge the value of a share. If the $100,000 company had a net income of $5,000, the EPS would be $5 for a price-to-earnings ratio of 20. If 100 new shares were sold, the EPS would decrease to $4.55. If investors believe the stock should be priced at a P/E ratio of 20, the stock price will drop to $91 from the $100 price it had before the new shares were issued.

investing money:

What investors want to know when a company issues new shares to raise capital is what the company will do with the money to increase shareholder value. A company usually explains its capital plans when the new share issue funds are raised. If the plan is to buy assets or even another company in a way that will greatly increase profitability, the share price should go up. If the company is raising capital without a viable fund utilization plan, then the investors may sell the shares, which will necessarily lead to a decrease in the share price.

Evaluate previous results:

Companies with business models for growth by acquisition may rely on selling more shares as a regular way to raise money. Investors will realize a couple of issues with stocks whether or not a company is doing a good job of putting that money to work when measured on a stock basis. With the sale of additional shares offered, there is often a short-term drop in the share price which can hurt existing shareholders. But this could be a good buying opportunity for investors who believe in the company’s long-term prospects.

 Disclaimer: The content of this article is for informational purposes only. The information provided should absolutely not be considered as investment advice or a recommendation. No warranty is made, express or implied, as to the accuracy of the information or data contained herein. Users of this article agree that Money Secrets does not accept responsibility for any of their investment decisions. Not every investment or trading strategy is suitable for anyone. See the risk warning statement.