Dilution and Earnings Per Share: Financial Terms and Explanations

Continuing a discussion on the introductory article on financial terms and explanations, this article discussion common share dilution. Firstly, some background for EPS, let’s use a firm’s Net Income (NI), in this case on a per-share basis. The formula to derive this figure would be: Earnings per share (EPS) = NI / # of common shares. This changes when you consider distribution of Net Income, then the formula is: Net Income = Dividend paid to shareholders + Addition to Retained Earnings. When you consider the stock market: market price / earnings per share = P/E ratio.

Losing Shareholder Value in Share Dilution

EPS = NI / # common shares; EPS diluted < EPS basic; share dilution (loss in existing shareholders' value).

Let’s use an example to show how EPS dilution occurs. A fictitious company called General Ford wants to build a new facility to meet future demand of–vacuums. There is 1 million common shares and no debt currently (haha, you CAN tell it’s fiction). The current market share price = $5 –> market value =$5MM. Book value = $10MM –> $10 per share.

General Ford has experienced difficulties, including cost overruns, regulatory delays, and below normal profits. Market-to-Book ratio = 5/10 = 0.5. (Successful firms rarely have market prices less than book values.)

More info:

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Corner Solution – Perfect Substitutes: Demand Theory

Continuing on with demand theory. Previously we discussed the Cobb Douglas function, now we move into perfect substitutes and the corner solution. Here are some factors to keep in mind.

1. Indifference curves must interest one of the axis (not necessity or essential good)
2. Budget constraint line is such that the slope is greater than the MRS (marginal rate of substitution) (MRS x1, x2) good 2 for good 1 at the intercept (M/p2).

For example: Perfect substitutes: the solution –> spend your entire budget on the cheaper of any two goods to maximize utility. This is mathematically express like:

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Personal Budget Basics for Beginners

DON’T say the B-word. What caused this stigma I have no idea, but one thing is for certain, people who don’t know how to handle their money in the most basic ways know one thing for sure, don’t tell me to ‘budget’.

The fact of the matter is this, the basics of budgeting, simply taking all of your income in and calculating expenses going out to arrive at your (hopefully) positive balance, remain an integral component of basic money management. Whether you’re a youth, or just ready to take control of your own money, understanding where you money goes is crucial.

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Treasury Bills (T-Bills) and Interest Rates Summary

Here is some brief notes on the function and descriptions of these financial instruments.

Treasury Bills (T-Bills)

Government of Canada issues T-Bills in certain lengths: 98,182, 364 days
– issued in denominations of $1000.00
– bought at a discount
– pay no regular interest (no coupons)

*When T-bills go up, interest goes down*

Some Keys on Interest Rates

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How to Check Your Credit Report for Free in Canada – TransUnion and Equifax

Contact Information and Credit Report Forms

Did you know you can check your credit report for free? You can get instant copies online by paying a fee. However, a government mandate on privacy means you can check your credit score for free, you just have to jump through some hoops and send in some documents. It’s not easy to find all the necessary information so we’ve compiled the forms, instructions, and lists here at DiscussEconomics for your review.

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You Don’t Need to be Rich to Invest

Some say, “all but the most sophisticated people will spend a life time paying off their debt.”

Is that true? If so why? Is debt a fact of financial life? Can only the rich afford to invest?

The word ‘sophisticated’ does NOT mean rich or well off. For example, does debt include mortgage payments? Technically it does, but the more worrisome part of most people’s debt load is the debt on depreciating liabilities or non tangibles. Want two examples? Depreciating liability: car. Non tangible: Putting a weekend away or a meal out on your credit card and still paying for it a year later.

Tips for Personal Budgeting

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Financial Statements – Terms and Explanations

Definitions on Income Statements

Here is a brief synopsis of key financial terms for introductory finance majors and business folks regarding income statements and balance sheets. Firstly, defining some terms:

Income Statement : A statement measuring a firm’s financial performance over a period of time. Generally, it records revenues and expenses to derive income over a specified period

Balance Sheet : This analysis sheet provides a “snapshot” at a point of time of the firm’s health in terms of total assets (what do they own), total liabilities (what do they owe), and equity (how much of the firm’s assets are financed by the owners).

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Canadian Housing Market Trends – 1.99% Variable Interest Rates Return

The prime interest rate that banks can borrow from the Central Bank still sits at 1%. Mortgage rates are generally pegged to bond rates, but the overall economic sentiment around borrowing impacts what consumer pay for their home borrowing. The Investor’s Group rolled out another attempt at 1.99% variable 3 year mortgage in early May. Who can qualify depends on a number of factors, having CMHC insurance is usually a pre requisite to cover any possibility of loss for the lender. Overall, what does this mean for the economy in Canada?

There are signs of overall economic strength, but also stagnation. The recent figures on the job market saw a increase in unemployment. That doesn’t stop many from jumping into the market for record setting interest rates. Money is cheap and those who want a home won’t pay any less in interest payments than they can now. But that’s also the risk. At 1.99% you can’t go ANY lower, and everyone expects rates to increase, and perhaps jump in the short term. But we’ve been hearing this kind of talk for years now, talk of increasing interest rates, talks of housing bubbles, yet nothing has happened as of yet.

It’s true, interest rates WILL increase eventually, and variable mortgage holders will be the first to feel the affects. That means if you can barely scrape by with your current housing selection, then consider downsizing your expectations and take on less debt. But it’s not just borrowers that need to pay attention to the market trends.

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How is the Phillips Curve Related to Labour Market Behaviour?

This Phillips curve formula: = π -ε (u-u*). Remember, in the labour market, nominal wage is assumed to move quickly and the labour market will always be in equilibrium. The equilibrium amount, N*, is considered to be full employment in the labour market. The unemployment rate is then considered by the following: (u-u*) = (N*-N)/N

Consider the transition period between the short run and the long run, there is no more flexible wage in the labour market. Instead, wage is sticky (slow moving). Slowly adjusting wages will lead to some unemployment rate, that is not the full employment level of the unemployment rate u*. Read more »

Deriving the Aggregate Demand Curve

Check out this graph:
aggregate demand curve
For a given nominal money stock, a price level decrease increases the real money stock. This shifts the LM curve outward, and the interest rate goes down and income increases. Therefore, along the AD curve, a price level decrease )holding the nominal money stock constant) is consistent with an income increase, and the AD curve slopes downward.

Mathematical Derivation of AD Curve

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