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Dilution Potential

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Micromanagement, Inc., has 8 million shares of stock outstanding and will
report earnings of $20 million in the current year. The company is considering
the issuance of 2 million additional shares that will net $30 per share to the
corporation.

a. What is the immediate dilution potential for this new stock issue?
b. Assume that Micromanagement can earn 12.5 percent on the proceeds of
the stock issue in time to include them in the current year's results. Should
the new issue be undertaken based on earnings per share?

Arrange the following income statement items so they are in the proper order of
an income statement:

Taxes
Shares outstanding
Interest expense
Depreciation expense
Preferred stock dividends
Operating profit
Sales
Gross profit
Earnings per share
Earnings before taxes
Cost of goods sold
Earnings after taxes
Earnings available to common
stockholders
Selling and administrative expense

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Solution Summary

The solution explains how to calculate the dilution potential of a fresh stock issue. It also has a format of income statement.

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Micromanagement, Inc., has 8 million shares of stock outstanding and will
report earnings of $20 million in the current year. The company is considering
the issuance of 2 million additional shares that will net $30 per share to the
corporation.

a. What is the immediate dilution potential for this new stock issue?

The existing Earnings Per Share (EPS) is 20/8=$2.5 ( this is ...

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