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Microcap & Penny Stocks : VLVT (was CSMA) -- Ignore unavailable to you. Want to Upgrade?

To: David Smith who wrote (2008)	11/29/1997 8:49:00 PM
From: TraderGreg	Read Replies (2) \| Respond to of 11708

My twenty month old is driving me crazy. Time for a break. Here's the dilution vs value issue. Stock A--Assets $5MM; Liabilities $2MM; Shareholder Equity $3MM Earnings: $0.5MM Outstanding shares: 15MM EPS:$0.033 Book value:$0.20 Assume stock price is 2 times book or $.40 with Market Cap $6.0MM P/E=13.0 OK, company wants to grow. Needs cash. It can borrow $1MM and purchase an asset worth $1MM. Balance sheet would show Shareholder Equity as unchanged. Initially, earnings would decline by interest cost of borrowing, say 10 % rate, to $0.4MM. If P/E stayed at 13.0, stock price would fall to $.347. Instead, company issues 2.5MM shares @$.40 (based on 2 times book value) bringing the total to 17.5MM shares. Shareholder equity is now $4.0MM since an asset was acquired from the funds received for floating 2.5MM shares @$.40. EPS would then fall to $.02857 and with a P/E of 13.0, the stock would only fall to $.3714 . The key here is that the stock is issued at market. Let's say the stock is issued at a discount to the market, right at book value. Now 5.0MM shares would have to be issued, bringing the total to 20.0MM shares with $4.0MM of Shareholder Equity. EPS would now be $0.5MM/20 or $.025 and at P/E of 13, the stock would decline to$.325. As long as the shares can be issued at a price above book, actually $.27 or more, the share price for a given P/E would still be higher than if borrowing were done. This would correspond to 3.7MM shares @.27/share From an other point of view, buying an asset for 1.0MM, would have to generate what level of earnings. Since the current 5.0MM assets are earning 0.5M per year, a 1.0MM addition would need to earn but 0.1MM per year, bring total earnings to $0.6MM per year. As long as the revised share total is 18MM or less, the asset acquisition was worth it (0.6/18.0=$0.033EPS). More importantly, if the 1.0MM asset could generate a better return on assets than 0.1MM, then the acquisition would be clearly worth it. For low rates of borrowing, debt would be preferred. For higher rates of borrowing, issuing shares would be preferred. The key here is the return on assets however. The higher the return, the greater the apparent dilution that can be tolerated. TraderGreg I was once in a stock that was issuing shares daily, you know to pay rent, answering service, advertising. Not one dime went to growing the company. That was dilution.