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Do the Math


Do the Math

Photograph by Tetra Images/Getty Images

The theoretical diluted price, i.e., the price after an increase in the number of shares, can be calculated as:

Theoretical Diluted Price = ((O x OP) + (N x IP)) / (O + N) where:

O = original number of shares

OP = Current share price

N = number of new shares to be issued

IP = issue price of new shares

For example if there is a 3-for-10 issue, the current price is $0.50, and the issue price is $0.32, we have:

O = 10, OP = $0.50, N = 3, IP = $0.32 and TDP = ((10 x 0.50) + (3 x 0.32)) / (10 + 3) = $0.4585

Stock Dilution, Wikipedia

Eight parentheses! It’s Algebra August.

The Knight Capital Group (KCG) collapse is moving in real time. The dollars-in are in the realm of $400 gazillion. The yield, while they work this puppy out, is a non-Buffett 2 percent or so.

What gives pause is the reported $1.50 “issue price of new shares.” That would suggest ~267 million shares earning a 2 percent Apple (AAPL)-like dividend. (Do JPMorgan (JPM) shares pay 2 percent?)

I await a formal calculation of the KCG dilution and wealth destruction. Would bankruptcy have been preferred?

What I know for certain is most media types and the financial public avoid arithmetic watered down. (Memo: Dilution algebra rivals equipment-lease accounting for failure on various and sundry levels of the CFA exam.)

Smiles will be had. Jobs will be saved. No one will lose. Everybody gets a ribbon. Do the math. Discuss.

Keene hosts Bloomberg Surveillance 7-10 a.m. ET on 1130 AM in the New York metro area and nationally on SiriusXM 113.

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