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Meaning / Definition of

Dilution

Categories: Fundamental Analysis, Legal, ,

Dilution occurs when a company issues additional shares of stock, and as a result the earnings per share and the book value per share decline. This happens because earnings per share and book value per share are calculated by dividing the total earnings or book value by the number of existing shares. The larger the number of shares, the lower the value of each share. Lower earnings per share may trigger a selloff in the stock, lowering its price. That's one reason a company may choose to issue bonds rather than new stock to raise additional capital.Similarly, if companies merge or one buys another, earnings may be diluted if they don't increase proportionately with the combined number of shares in the newly created company.Dilution can also occur if warrants and stock options on a stock are exercised, and if convertible bonds and preferred stock the company issued are converted to common stock. Companies must report the worst-case potential for such dilution, or loss of value, to their shareholders as diluted earnings per share.

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Definition / Meaning of

Charitable Remainder Trust

Categories: Estate Planning, Legal, ,

A kind of charitable trust in which someone places substantial assets into an irrevocable trust.The trust is set up so that the donor (or other beneficiaries named in the trust) receives trust income for a number of years or for life, after which the assets go to a tax-exempt charity. The IRS allows a large deduction in the year the assets are donated to the trust. The tax savings are sometimes used to buy an insurance policy on the life of the donor payable to children or grandchildren at the donor's death. This way the donor can make the gift to charity, receive income from the trust, and still make a large gift at death to family members. There are several kinds of charitable remainder trusts, including charitable remainder unitrusts and charitable remainder annuity trusts. Compare: charitable lead trust

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