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Chapter 15: Investment Banking: Public and Private Placement Chapter 15 Problems 1. Dilution effect of stock issue (LO3) The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \$6,000,000 in the current year. The company is considering the issuance of 1 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 the Hamilton Corporation can earn 10.5 percent on the proceeds of the stock issue in time to include them in the current years results. Should the new issue be undertaken based on earnings per share? 15-1. Solution: 15-1 Chapter 15: Investment Banking: Public and Private Placement Hamilton Corporation a. Earnings per share before stock issue \$6,000,000/4,000,000 = \$1.50 Earnings per share after stock issue \$6,000,000/5,000,000 = \$1.20 b. Net income = \$6,000,000 + .105 (1,000,000 \$30) = \$6,000,000 + .105 (\$30,000,000) = \$6,000,000 + \$3,150,000 = \$9,150,000 15-1. (Continued) Earnings per share after additional income EPS = \$9,150,000/\$5,000,000 = \$1.83 Based on the current years results, the public offering should be undertaken. E.P.S. goes from \$1.50 to 1.83. Of course, other variables may also be considered. 2. Dilution effect of stock issue (LO3) In problem 1, if the one million additional shares can only be issued at \$23 per share and the company can earn 6.0 percent on the proceeds, should the new issue be undertaken based on earnings per share? 15-2. Solution: 2 Chapter 15: Investment Banking: Public and Private Placement Hamilton Corporation (Continued) Net income = \$6,000,000 + .06 (\$23,000,000) = \$6,000,000 + \$1,380,000 = \$7,378,000 Earnings per share after additional income EPS = \$7,378,000/5,000,000 = \$1.48 No, E.P.S. would decline by 2 cents from \$1.50 to \$1.48. 3. Dilution effect of stock issue (LO3) American Health Systems currently has 6,000,000 shares of stock outstanding and will report earnings of \$15 million in the current year. The company is considering the issuance of 1,500,000 additional shares that will net \$50 per share to the corporation. a . What is the immediate dilution potential for this new stock issue? b . Assume that American Health Systems can earn 12 percent on the proceeds of the stock issue in time to include them in the current years results. Should the new issue be undertaken based on earnings per share? 15-3. Solution: American Health Systems a. Earnings per share before stock issue \$15,000,000/6,000,000 = \$2.50 Earnings per share after stock issue \$15,000,000/7,500,000 = \$2.00 15-3 Chapter 15: Investment Banking: Public and Private Placement b. Net income = \$15,000,000 + .12 (1,500,000 \$50) = \$15,000,000 + .12 (\$75,000,000) = \$15,000,000 + \$9,000,000 = \$24,000,000 Earnings per share after additional income EPS = \$24,000,000/7,500,000 = \$3.20 Yes, the EPS of \$3.20 is higher than \$2.50.... View Full Document

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