Question

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Louisiana Timber Company currently has 3 million shares of stock outstanding and will report earnings of $6.50 million in the current year. The company is considering the issuance of 2 million additional shares that will net $34 per share to the corporation a. What is the immediate dilution potential for this new stock issue? (Do not round intermediate calculations and round your answer to 2 decimal places.) Dilution 5 2.17 per share b-1. Assume the Louisiana Timber Company can earn 1160 percent on the proceeds of the stock issue in time to include it in the current year's results. Calculate earnings per share. (Do not round Intermediate calculations and round your answer to 2 decimal places.) Earnings per share s 288 b-2. Should the new issue be undertaken based on earnings per share? Yes No

Answer 1

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Answer:

a) EPS before issuance = 6.5 / 3 = 2.167

EPS after new sahre issue = 6.5 / 5 = 1.2

Dilution potential = 2.167 - 1.3 = 0.867 per share

b) New EPS = (Existing earning + Return on new share issue) / Total sahres

= (6.5 + 34*.116*2) / 5 = 2.88 per share

c) Yes, it should be taken as it will increase the EPS to 2.88 from ts current EPS level of 2.167 per share.