How can dilution be determined in a merger?

In the context of a merger, dilution pertains to the reduction in the ownership percentage of existing shareholders when new shares are issued to facilitate the acquisition. The correct method for determining dilution in a merger is primarily through the calculation of the weighted cost for the buyer.

When a company merges with or acquires another, it may issue new equity to finance the transaction, which can cause the existing shareholders’ ownership interest to decrease. The weighted average cost of the shares informs how this new equity issuance affects the overall value attributed to existing shares. If the cost of the new shares is lower than the current market value of existing shares, this indicates potential dilution, as the acquisition could devalue the existing shares if not managed properly.

Other options may provide valuable insights but do not directly assess dilution as it pertains to mergers. Analyzing share prices in relation to market trends does not specifically tie to ownership percentages or dilution effects directly. Competitor performance evaluation, while useful for strategic context, does not inform ownership dilution directly either. Likewise, employee stock options are relevant to aggregate share structure but are not a primary focus in assessing dilution in the context of a merger's financing structure.

Thus, calculating the weighted cost for the buyer aligns directly with the implications of share issuance during