Fully Diluted Valuation (FDV) is a term used in finance and investing to refer to the total value of a company, assuming that all outstanding securities, including options, warrants, and convertible securities, are exercised and converted into common shares. In this article, we will discuss Fully Diluted Valuation in detail, covering the following headings:
What is Fully Diluted Valuation?
How is Fully Diluted Valuation calculated?
Why is Fully Diluted Valuation important?
Criticisms of Fully Diluted Valuation
Conclusion
1. What is Fully Diluted Valuation?
Fully Diluted Valuation (FDV) is the total value of a company, assuming that all outstanding securities, including options, warrants, and convertible securities, are exercised and converted into common shares. This means that FDV represents the maximum market value of a company, taking into account all the securities that can potentially be converted into common shares in the future.
2. How is Fully Diluted Valuation calculated?
Fully Diluted Valuation is calculated by multiplying the company's fully diluted shares outstanding by the price per share. Fully diluted shares outstanding include all outstanding common shares, as well as all potentially dilutive securities, such as stock options, warrants, and convertible securities.
The formula for calculating Fully Diluted Valuation is:
Fully Diluted Valuation = Fully Diluted Shares Outstanding x Price per Share
For example, if a company has 10 million common shares outstanding and 2 million outstanding stock options exercisable at $10 per share, the fully diluted shares outstanding would be 12 million. If the price per share is $20, the Fully Diluted Valuation would be:
Fully Diluted Valuation = 12 million x $20 = $240 million
3. Why is Fully Diluted Valuation important?
Fully Diluted Valuation is important because it provides a more accurate measure of a company's market value than simply using its current market capitalization. Market capitalization only takes into account the outstanding common #shares , and does not consider the potential dilution from other securities such as options and warrants.
FDV is particularly important for #investors and analysts who are evaluating a company's potential for growth and assessing its overall financial health. It is also useful for determining the value of a company's stock options and other securities that may be exercised or converted into common shares in the future.
4. Criticisms of Fully Diluted Valuation
Fully Diluted Valuation has some limitations and criticisms. One criticism is that it assumes that all potentially dilutive securities will be exercised or converted into common shares, which may not always be the case. In reality, some securities may expire or be canceled before they can be exercised or converted.
Another criticism is that FDV can be misleading if the company has a large number of outstanding #securities that are unlikely to be exercised or converted, such as warrants that are far out-of-the-money. In this case, the Fully Diluted Valuation may overstate the company's true market value.
5. Conclusion
Fully Diluted Valuation is a useful metric for investors and analysts who are evaluating a company's market value and potential for growth. It provides a more accurate measure of a company's value than market capitalization, as it takes into account all potentially dilutive securities, such as stock options and warrants. However, FDV has some limitations and criticisms, and investors and analysts should be aware of these when using FDV to evaluate a company's financial health and prospects for growth.
