Question

American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000 additional shares that will net $30 per share to to corporation.

A. What is the immediate dilution potential for this new stock issue?

B. Assume that the American Health Systems can earn 9% on the proceeds of the stock issue in time to include them in the current years results. Calcualte earnings per share. Should the new issue be undertaken based on earnings per share?

Answer 1

(A) 0.32794 EPS

(B) 1.80 EPS

Step-by-step explanation:

10,000,000 earning / 6,400,000 shares= 1.5625 EPS

10,000,000 earning / (6,400,000 + 1,700,000) = 1.23456 EPS diluted

Immmediate dilution potencial 1.5625 - 1.23456 = 0.32794

each shares losses $0.32794 of earning

(B)

9% of the proceeds is gain

1,700,000 x 30 x 0.09 = 4,590,000

(10,000,000 + 4,590,000) / (6,400,000+1,700,000) = 1.80123456