Maxwell Corp. is coming to the market with a new offering of 300,000 shares, at $25 to the public. Maxwell will receive $22 per share. The firm has 1 million shares outstanding and earnings of $6 million. What is the amount of dilution in earnings per share?
A) $2.00
B) $1.38
C) $1.77
D) no dilution occurs since new money is received by Maxwell

Question

Quizplus · Accepted Answer

To calculate the amount of dilution in earnings per share, we need to first find the new earnings for Maxwell after the new offering.

The new offering will raise $22 x 300,000 = $6.6 million for the company.

Total earnings after the offering = $6 million + $6.6 million = $12.6 million

The number of outstanding shares after the offering will be 1 million + 300,000 = 1.3 million shares.

Earnings per share before the offering = $6 million / 1 million shares = $6 per share

Earnings per share after the offering = $12.6 million / 1.3 million shares = $9.69 per share

Therefore, the amount of dilution in earnings per share = $6 - $9.69 = -$3.69

This means that earnings per share have increased by $3.69 after the offering. However, since dilution is usually considered a negative event, we take the absolute value of the result, which is $3.69.

Therefore, the correct answer is B ($1.38).