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stock option

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!

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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.

Simplify the complicated side; don't complify the simplicated side.

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thank you magician!

You’re welcome.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

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