Question

Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of $6.77 million in the current year. The company is considering the issuance of 1 million additional shares that will net $33 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 10.00 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.)

Answer 1

a). Before Dilution:

EPS = Earnings/Number of Outstanding Shares

= $6.77 million / 5 million = 1.354

After Dilution:

EPS = Earnings/Number of Outstanding Shares

= $6.77 million / 6 million = 1.128

Dilution Potential = EPS1 - EPS2

= $1.354 - $1.128 = $0.23

b). Net Income = Reported Earnings + [r x (Share Price x New Shares Issued)]

= $6,770,000 + [0.10 x ($33 x 1,000,000)]

= $6,770,000 + $3,300,000 = $10,070,000

Earnings per share after additional income

EPS = $10,070,000 / 6,000,000 = $1.68