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?

Question

Quizplus · Accepted Answer

To calculate the dilution in earnings per share, we need to calculate the earnings per share before and after the new offering.

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

After the offering: 
New shares issued = 300,000 
Total shares outstanding = 1 million + 300,000 = 1.3 million

New capital raised = 300,000 shares x $22 per share = $6.6 million

Total earnings = $6 million 
Total capital raised = $6.6 million

Earnings per share = ($6 million / 1.3 million shares) = $4.62

The dilution in earnings per share = $6 - $4.62 = $1.38

Therefore, the answer is B, $1.38.