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    Houston Corp: Issuance of new stock and rate of return

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    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?

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    Solution Preview

    (a) Compute the potential dilution from this new stock issue.

    The potential dilution is the reduction in EPS due to the increase in number of shares.
    The current EPS = Net Income/Number of shares outstanding = 3,000,000/750,000 = $4
    The new issue will add 300,000 more shares and the total shares will be ...

    Solution Summary

    The solution explains the calculations relating to issuance of new stock