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 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-like dividend. (Do JPMorgan 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.