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# Dilution Potential - Louisiana Timber

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Louisiana Timber Company currently has 5 million shares of stock outstanding
and will report earnings of \$9 million in the current year. The company is
considering the issuance of 1 million additional shares that will net \$40 per
share to the corporation.

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

b. Assume the Louisiana Timber Company can earn 11 percent on the
proceeds of the stock issue in time to include it in the current year's results.
Should the new issue be undertaken based on earnings per share?

c. if the one million additional shares can only be issued at \$32 per
share and the company can earn 5 percent on the proceeds, should the new
issue be undertaken based on earnings per share?

#### Solution Preview

a. 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 9/5=\$1.8. The new issue will add 1 million addtional shares and ...

#### Solution Summary

The solution explains how to calculate the effect on EPS of a new stock issue

\$2.19

## Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of \$9 million in the current year.

I need a solution to the attach problems.

Question # P1
Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of \$9 million in the current year. The company is considering the issuance of 1 million additional shares that will net \$40 per share to the corporation.

a. What is the immediate dilution potential for this new stock issue?
b. Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include it in the current year's results. Should the new issue be undertaken based on earnings per share?
Question # P3
Rockwell Paper Company had earnings after taxes of \$580,000 in the year 2003 with 400,000 shares outstanding. On January 1, 2004, the firm issued 35,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 25 percent.

a. Compute earnings per share for the year 2003.
b. Compute earnings per share for the year 2004.
Question # C3
Sampson Orange Juice Company normally takes 20 days to pay for its average daily credit purchases of \$6,000. Its average daily sales are \$7,000, and it collects accounts in 28 days.

a. What is its net credit position? That is, compute its accounts receivable and accounts payable and subtract the latter from the former.

Accounts receivable = Average daily credit sales x Average collection period
Accounts payable = Average daily credit purchases x Average payment period

b. If the firm extends its average payment period from 20 days to 35 days (and all else remains the same), what is the firm's new net credit position? Has it improved its cash flow?

Question # C1
University Catering sells 50-pound bags of popcorn to university dormitories for \$10 a bag. The fixed costs of this operation are \$80,000, while the variable costs of the popcorn are \$.10 per pound.

a. What is the break-even point in bags?
b. Calculate the profit or loss on 12,000 bags and 25,000 bags.
c. What is the degree of operating leverage at 20,000 bags and 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases?
d. If University Catering has an annual interest payment of \$10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags.
e. What is the degree of combined leverage at both sales levels

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