Louisiana Timber Company currently has 2 million shares of stock outstanding and

Question

Louisiana Timber Company currently has 2 million shares of stock outstanding and will report earnings of $6.79 million in the current year. The company is considering the issuance of 1 million additional shares that will net $39 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.) Dilution per share b-1. Assume the Louisiana Timber Company can earn 12.60 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.) Earnings per share b-2. Should the new issue be undertaken based on earnings per share? Yes No

Explanation / Answer

Earnings per share before stock issue = 6,790,000/ 2,000,000

Earnings per share before stock issue = 3.395

Earnings per share after stock issue = 6,790,000/ 3,000,000

Earnings per share after stock issue = 2.2633

Dilution = 3.395 - 2.2633

Dilution = 1.13

Part B

Net Income = 6,790,000 + 0.1260 * (1,000,000 * 39)

Net Income = 11,704,000

EPS after additional Income = 11,704,000/ 3,000,000

EPS after additional Income = 3.90

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