011 Real Cost of Issuing Shares

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Use cost of opportunity instead of CAPM.

Written post: http://stockpickinginsights.com/cost-of-issuing-shares-capm-alternative/

When a company issues shares, they likely need the money for their operations. But why not get a loan instead? Sometimes they can’t. Sometimes they consider share issuing to be less expensive.

If you use beta in company valuations, CAPM may make sense for you. If not, use opportunity costs instead.

As a thumb rule, I’d rather consider that an increase of shares outstanding of x% will approximately decrease my share of all future gains in x%, divided by my investing period to get an annualized rate.

So if Facebook issues 10% of all shares outstanding and I expected a 8% Enterprise Value 10Y CAGR, I can now roughly expect a 8 – 10%/10 = 7% CAGR instead.

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