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Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of $6.32 million in the current year. The company is considering the issuance of 1 million additional shares that will net $35 per share to the corporation. a. What is the immediate dilution potential for this new stock issue?

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abiolataiwo2015

Answer:

0.214 per share

Explanation:

Calculation to determine the immediate dilution potential for this new stock issue

First step is to calculate the EPS before issuance

EPS before issuance = 6.32 / 5

EPS before issuance= 1.264

Second step is to calculate the EPS after new share issue

EPS after new share issue = 6.32 / (5+1)

EPS after new share issue=6.32/6

EPS after new share issue= 1.05

Now let calculate the Dilution potential

Dilution potential = 1.264 - 1.05

Dilution potential = 0.214 per share

Therefore the immediate dilution potential for this new stock issue is 0.214 per share

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