The Houston Corp. needs to raise money for an addition to its plant. It will issue 300,000 shares of new common stock. The new shares will be priced at $60 per share with an 8.5% spread on the offer price. Registration costs will be $150,000. Presently Houston Corp has earnings of $3 million and 750,000 shares outstanding.
(a) Compute the potential dilution from this new stock issue.
(b) Compute the net proceeds to Houston Corp.
(c) What rate of return must be earned on the net proceeds so that no dilution of earnings per share occurs?
a) Compute the potential dilution from this new stock issue.
The dilution potential is related to the reduction in the Earnings Per Share (EPS) of the firm. EPS is calculated by dividing the net income by the number of shares outstanding. The present EPS of the firm is 3,000,000/750,000=$4.00 ...
The solution explains how to calculate the net proceeds and potential dilution from a new stock issue