Equity and Earnings Dilution
{"Image DocumentName": "Equity and Earnings Dilution", "Image ImageDescription": "Does the issuance of new equity decrease earnings per share? On the face of it, it would seem so \u2013 after all, now there are more shareholders with a claim to the same company! Look at the following news item in the Mar. 5, 2009 WSJ: Nomura Holdings Inc. set a price of 417 yen ( 4.24) per share for its planned share offering, putting the total value of the sale at billion yen, or  3.04 billion. The share sale, the first from the country s largest brokerage firm by assets in 20 years, comes as Nomura s share price and earnings slump amid a difficult business environment. Like many of Japan s big financial institutions, Nomura has been roiled by the steep drop in the value of Japanese securities. All of the country s big banks are tapping the market for fresh funds, either in preferred stock issues or through bonds. Partially because of concerns that the new shares will dilute earnings, Nomura s stock price has dropped 25% following the Feb. 6 announcement of the share sale. They are down 71% since the start of the fiscal year that began in April. Wednesday, they dropped 4.7% to 430 yen. So it looks like the WSJ at least does believe in the dilution theory! Or does it? The dilution theory is true only if you also assume explicitly or implicitly that total earnings will not increase, along with the increase in the number of shares outstanding. The issuance of equity, in general, would allow the company to buy assets, which would generate more earnings. Hence, it is not obvious that issuing equity per se would dilute earnings.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}