Question

Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock...

Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock at $22 to the public. Maxwell will receive $19 per share. The firm has one million shares outstanding and earnings of $6 million before recording the new issue. What is the amount of dilution in earnings per share? Hint: flotation costs reduce earnings.

  • $2.79

  • $1.38

  • $1.77

  • No dilution occurs since new money is received by Maxwell.

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Answer #1
i Earning = 6000000
ii Number of share= 1000000
iii=i/ii EPS = $              6.00
New EPS
eanring = 6000000
Less: Flotation cost(22-19)*450000 1350000
Revised earning 4650000
Number of share=1000000+450000 1450000
EPS = $              3.21
Dilution = 13.33-10.33 $              2.79
Answer = $              2.79
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