Question

Louisiana Timber Company currently has 4 million shares of stock outstanding and will report earnings of $6.03 million in the current year. The company is considering the issuance of 2 million additional shares that will net $36 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.)
  

b-1. Assume the Louisiana Timber Company can earn 12.80 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.)

b-2. Should the new issue be undertaken based on earnings per share?
  

• Yes

Answer 1

Answer : (a) Calculation of Immediate Dilution potential for this new stock issue :

Earning per share before Stock Issue = Net Income / Number of shares outstanding

= 6,030,000 / 4,000,000

= 1.5075

Earning per share after Stock Issue = Net Income / Number of shares outstanding

= 6,030,000 / (4,000,000 + 2,000,000)

= 1.005

Immediate Dilution potential for this new stock issue = 1.5075 - 1.005 = 0.5025 or 0.50

(b-1) Calculation of Earning per share

Net income = 6,030,000 +[(2,000,000 million shares * $36) * 12.80%]

= 6,030,000 +[72,000,000 * 12.80%]

= 6,030,000 + 9,216,000

= 15,246,000

Calculation of Earnings per share after additional income

Earning per Share = $15,246,000 / 6,000,000

= $2.541 or $2.54

(b-2) Yes,as the EPS is higher than previous EPS.