What all aspects of a company are affected if its stock price drops? I don’t believe this was touched on in any of the readings specifically, but the question popped into my mind and I’ve been trying to work out all the details, considering what I’ve learned from the readings. Assume: Company BLAH closed last night at $100/share, 100,000 shares outstanding equals a $10 million mkt cap. Today, investors sold off BLAH and it closed out at $25/share, 100,000 shrs o/s and now a $2.5 million mkt cap. True intrinsic value of BLAH is somewhere close to $100/share. Also assume no one will take the Co private… What happens to the Company when its share price takes a big hit? I figure: 1. The Co will have a tougher time raising capital by issuing shares (relative to the previous day) 2. Potentially dilutive options are now less likely to be dilutive to eps. 3. Would the treasury stock account, or any other BS account change in value? My mind is drawing a blank… What else am I missing? What financial ratios, if any, will be affected? Thanks for the help. (edited for poor wording)
this is my input all ratios that are related to price will change of course… that includes ratios like PER PEG Dividend yield etc Company will indeed have a tougher time trying to raise capital IF valuation of stock is a lot higher than price in the market The dilutive securities will still be dilutive to the same extent because eps does not change but it will be less likely that the conversion will take place Market cap will change but other than that I don’t think anything will I am curios what others will say about this
Thanks, I forgot to address the valuation ratios. Is this just a lame question that has no relevance? I was hoping more people chime in…
Culley - Your points 1 & 2 are correct. Point 3… no balance sheet accounts will change.