Question

14-8 ock Issue EastJet Airlines is an all-equity firm with a book value of $100,000,000 and 16,000,000 shares outstanding. Its stock currently trades at $9 per share, and EPS is $0.50. EastJet wishes to issue another 1,500,000 shares to finance the purchase of a new IT system. The new system will increase EBIT by $500,000. The company believes it would have to issue shares at $8.70 and that it would incur flotation costs of 6%. EastJet's tax rate is 30%, and the company assumes its P/E ratio will remain the same. Calculate whether the company will suffer any dilution (i.e., a decrease) to its EPS, book value per share, and market price if it goes ahead with the financing and the new system. How much must EBIT change so that there is no dilution to EPS and market price?

Answer 1

OS sheet of Answer Current Earnings = No. of shares & EPS 16000000 x or sof 8000000 Shares outstanding - 16,000,000 Book value I - $1.000,000,000 Market Price per share - $9 EPS - 4050 Calculation of new EPS Total Earnings after issuing new shares - Increase in EBIT = $500 coo ress tax @ 30% & I soooo Incremental Earnings - - $ 350 000 Add Current Earnings $ 8000 000 ( 16000000 X 0.58 ) Earnings after issuing new shares & 8350 000 No. of shares after issuing new shares + Existing shares New shares Toteel shares 16.000.000 1500000 175 ooooo New Eps Total Earnings Total shares 83 soooo . 7S 50 ooo $0 1477

sheet - calculation of old book valu Per share Book value Ho of sharel - 100 coooos 16000 ooo 2 $ 6.25 Pele share Calculation of new book valcu Per share 100 ooo ooo 13050000 Book value (Existing) = Cash from issue of new shares (1500000 X 8.70 ) Floatation Cost 1305060 X 6Y 783000 Book value 112267000 No. of shares Clost issie) & 1700000 Book value for share Book value No. of shares = 112267000 = $6.42 175 o oco calculation of market for value for share 18 & Earnings XPE Ratio Noi of shares Exist PE Ratios 9 0.50 Earnings Post lace a No. of shases - $83 so ooo 17500 oa market value fer chase 2 83 soocus x8= 17500 W 8.59.

Sheet-3 Yes and there is raakt dilution market in value EPS per book valu shoose. Per share How no much must dilution to EBIT Eps Change so that there is and market price? old EPS = $0.50 new Eps then if it is required. calculate total earnings Eps & Total Earnings No. of shases Post iskee 0.50 F Total Earnings. 175 000 - Total Earnings a 8750000 Existing Earnings 80 woo 75oooo. Increment required Cafta tar) EBIT reg wald (increment ) = & 1071429 75ooo (1-304.)