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The Calculation of Earnings Per Share and Market Value of Equity: Should Common Stock Equivalents Be Included?

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Most stock market participants calculate the market value of equity through amultiplication of the price per share by the number of outstanding shares. This studyshows that this practice is inconsistent with the assumption that the market price pershare incorporates the potential dilution due to outstanding financial instruments that canbe converted to common stocks (common stock equivalents, CSE). If the market priceincorporates all CSE, the market value of equity should be calculated through themultiplication of price per share by the sum of outstanding shares and shares that will beissued upon dilution.
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