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.
What is the immediate dilution potential for this new stock issue?
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?
Louisiana Timber Company
Earnings per share before stock issue
$9,000,000/5,000,000 = $1.80
Earnings per share after stock issue
$9,000,000/6,000,000 = $1.50
$ .30 per share
= $9,000,000 + .11 ($1,000,000
= $9,000,000 + .11 ($40,000,000)
= $9,000,000 + $4,400,000
Earnings per share after additional income
Yes, the EPS of $2.23 is higher than $1.80.