Dilution of Value Book versus Market Values

We now examine dilution of value by looking at some accounting numbers. We do this to illustrate a fallacy concerning dilution; we do not mean to suggest that accounting value dilution is more important than market value dilution. As we illustrate, quite the reverse is true.

Suppose Upper States Manufacturing (USM) wants to build a new electricity-generating plant to meet future anticipated demands. As shown in Table 16.11, USM currently has one million shares outstanding and no debt. Each share is selling for $5, and the company has a $5 million market value. USM's book value is $10 million total, or $10 per share.

© The McGraw-Hill Companies, 2002

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