finance

[REVIREB]

Recent Financial Data on Pisa Construction Inc.
Stock price    $40
Number of Shares    10000
Book net worth         $500,000
Market value of firm $400,000
Earnings per share       $4
Return on investment   8%

Pisa has not performed spectacularly to date. However, it wishes to issue new shares to obtain $80000 to finance expansion into a promising market. Pisa's financial advisers think a stock issue is a poor choice because, a month other reasons, "sale of stock at a price below book value per share can only depress the stock price and decrease shareholders' wealth." To prove the point they construct the following example:  "Suppose 2000 new shares are issued at $40 and the proceeds are invested. (Neglect issue costs.) Suppose return on investment doesn't change. Then
Book net worth=$580,000
Total earnings= .08(580,000)=$46,400
Earnings per share=46,400 = $3.87
       12,000
Thus, EPS declines, book value per share declines, and share price will decline proportionately to $38.70."
 Evaluate this argument with particular attention to the assumptions implicit in the numerical example.

[Hammer]

Do your own homework

[acw]

I agree - it's the only way to learn.

[Didwot]

When considering the issuance of low yielding mid range equities the corporate ethos demands a rationalization of the shareholder/investment financial dichotomy.
In advanced analysis models we look not only to capital enrichmnet expectations, but also to a dynamic revenue stream enhancement, on both the short to mid term and longer term basis.
Only by understanding the underlying and inherent volatilty in the astable market place can the sophisticated investment vehicle function in atruely integrated and seemsless way.
On any given example the specifics of the actualisation are only relevant within the true marginalisation of risk gain analysis, and each and every one of the foregoing points will require a thorough discussion to truly identify the dilution aspects of your example

[Oneeyedtic]

Revireb's question is only an obscure statement that if the value of a company's share is earnings divided by number of shares issued and then additional shares are issued but earnings remain the same as before the additional shares were issued then the value of a share is less than it was before the additional shares issue.

[acw]

REVIREB - when's the homework due in?

[THECORBYLOON]

DIDWOT Surely, though, if the EPS has see a diminution in the overall realisation of Value then that is a perfect example of the Milton Keynsian theory of market force dynamics or is that an over-simplification? Obviously EPS has a direct linkage to the multiplying factor applied to individual fundementals but what is often overlooked is the rationale behind the resultant Yield and I don't think that can be stressed enough.