Louisiana TmbCompany curenty has 3 mition shares of stock outstanding and will r

Question

Louisiana TmbCompany curenty has 3 mition shares of stock outstanding and will report eamings of $6.50 milion in the current year. The company is considering the issuance of 2 million additional shares that will net $34 per share to the corporation a. What is the immediabe dilution potential for this new stock issue? (Do not round Intermediate calculations and round your answer to 2 declmal places.) b-1. Assume the Louisiana Timber Company can eam 11.60 percent on the proceeds of the stock issue in time to include it In the current year's results Caloulate eamings per share. (Do not round Intermediate calculations and round your answer to 2 decimal places) b-2. Should the new issue be undertaken based on eamings per share? O No

Explanation / Answer

a. New shares = 3 + 2 = 5 million
Dilution = (6.5/3) - (6.5/5) = $0.87 per share

b-1 New Earnings = 6500000 + (2000000*34*11.6%) = $14,388,000
Earnings per share = 14,388,000 / 5,000,000 = $2.88

b-2 Existing EPS = 6.5 / 3 = $2.17 per share
Potential EPS = $2.88
Since, the potential EPS is more than the existing EPS the issue should be undertaken. Yes.

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