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Foundations Of Financial Management
Found in: Page 494
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of $9 million in the current year. The company is considering the issuance of 1 million additional shares that will net $40 per share to the corporation.

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

b. Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include it in the current year’s results. Should the new issue be undertaken based on earnings per share?

a. The dilution is $0.30.

b. Yes, the new issue should be undertaken.

See the step by step solution

Step by Step Solution

Computation of immediate dilution

Computation of growth in EPS

Conclusion: Hence, the new issue should be undertaken because earnings per share will grow by $0.43.

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