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Foundations Of Financial Management
Found in: Page 495
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

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 the corporation.

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

b. Assume that American Health Systems can earn 9 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. Should the new issue be undertaken based on earnings per share?

a. Immediate dilution is $0.328.

b. New EPS is $1.8012 and the new issue should be undertaken.

See the step by step solution

Step by Step Solution

Computation of immediate dilution

Computation of New EPS

Undertaking of new issue

The new issue should be undertaken because there will be no dilution and EPS will grow by $0.2387.

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