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New stock issue

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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 Summary

The solution explains how to calculate the potential dilution, net proceeds and rate of return that must be earned on the net proceeds so that no dilution of earnings per share occurs of a new stock issue.

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

The potential dilution is the decrease is Earnings per Share (EPS) due to the issue of new shares. We need to find out the current EPS and the new EPS.
EPS = Net Income/Number of share outstanding
The current EPS = 3,000,000/750,000=$4.00

After the new equity issue, the ...

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