Net New Equity Raised Formula Made Simple

The net new equity raised formula is a simple yet powerful tool for investors and entrepreneurs. It helps calculate the amount of new capital raised by a company.

To make it even simpler, let's break it down. The net new equity raised formula is: New Equity = Total Equity - Old Equity.

This formula is essential for understanding a company's financial health.

To calculate net new equity raised, you need to know two key components: Total Dividends (D) and Total Net New Equity Raised (E). The Total Dividends is the sum of all cash dividends paid out to stockholders during the reporting period.

Total Net New Equity Raised includes all new equity funds the company raised through issuing new shares, minus the cash spent repurchasing existing shares. This reflects the net cash flow from equity transactions with shareholders.

The formula for net new equity raised is: net new equity = stock issued - stock repurchased. For example, if a company issued new stock worth $500,000 but repurchased $300,000 in stock, the net new equity would be $200,000.

Related reading: What Is Net Cash Flow

Calculating cash flow to stockholders is a straightforward process. Start by determining the total dividends paid, which can be a significant amount.

To determine the net new equity, you need to consider the stock issued and repurchased during the fiscal year. In Example 1, the company issued new stock worth $500,000 but repurchased $300,000 in stock.

The net new equity is calculated by subtracting the stock repurchased from the stock issued, resulting in a net increase of $200,000. This is a crucial step in calculating cash flow to stockholders.

The cash flow to stockholders is then calculated by subtracting the net new equity from the total dividends paid, resulting in a cash flow of $1,800,000. This is a key component in understanding a company's financial performance.

Flotation cost is a one-time expense paid to third parties to facilitate the issuance of new securities in the market. The average flotation cost ranges from 2% to 8%, which may vary depending on the security issued.

This cost is unavoidable while raising capital for a new project or business, and it includes legal, investment banking, audit, and stock market fees.

The ideal approach to record flotation costs is to deduct the cost from the cash flows used to calculate the net present value. This cost is a cash outlay since the organization never received the amount.

The average range of flotation costs for issuing common stocks falls anywhere between a minimum of 2% to a maximum of 8%. This means that for every dollar raised, the organization will have to pay between 2 and 8 cents in flotation costs.

Flotation costs are incurred not just for stocks but also for other sources of raising capital like bonds and debentures. However, the cost of issuing stock is on the higher side.

Here are some key components of flotation costs:

Since flotation costs are high, organizations may look for alternate sources of raising capital to reduce the cost.

In 2018, ABC Inc. issued common stock in the market to raise $500 million. The current price of a stock in the market was $20, and the investment banker’s fees were 6% of the raised capital.

The investment banker’s fees were 6% of the $500 million raised capital, which amounts to $30 million. This is a one-time expense associated with issuing new stocks in the market.

ABC Inc. paid a dividend of $2 per share in 2019, and expected an increase of 12% in 2020. This shows how dividend payments can impact the cost of capital.

The flotation cost was calculated as 0.64% by subtracting the cost of existing equity from the cost of new equity. However, this approach is inaccurate and inflates the cost of capital.

In this example, the flotation cost resulted in an increase in the cost of new equity by 0.64%. This highlights the importance of accurately calculating flotation costs.

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