it is a silly question…
does anyone know whether stock option/ stock grant will increase equity, does it cause dilution?
i saw somewhere that option expense will reduce retained earning and increase paid-up capital, and so the equity will be unchanged.
but i am confused as all the while i thought stock option causes dilution…
thank you!
If you grant stock options or issue stock options which are exercised, equity will increase. Part of equity is common stock at par; if you issue more shares, you have more shares at par, so equity increases. Furthermore, if you’ve issued stock options that are exercised, you may have additional paid-in capital (if the exercise price exceeds the par value).
You’re correct that this will likely cause dilution because the rest of equity; retained earnings, in particular, will not increase, so it will be divided by a new (higher) number of shares. Equity will rise and the number of shares outstanding will rise, but the latter will increase by a bigger percentage than the former.
thank you magician!
You’re welcome.
Hi …can you please explain the last line…
“Equity will rise and the number of shares outstanding will rise, but the latter will increase by a bigger percentage than the former”
Definitely mark it to remember paid-in-capial