The Houston Corp. needs to raise money for an addition to its plant. It will issue 250,000 shares of new common stock. The new shares will be priced at $50 per share with a 9% spread on the offer price. Additional registration costs will be $150,000. Presently, Houston Corp. has earnings of $3 million and 700,000 shares outstanding.
a) Compute the potential dilution from this new stock issue.
b) Compute the net proceeds to Houston Corp.
c) What rate of return must be earned on the net proceeds of the new issue so that no dilution of earnings per share occurs? You may ignore the effect of the costs of the new issue on the numerator used in the earnings-per-share calculation by assuming it's been accrued already for purposes of the "before and after" calculation.

Question

Quizplus · Accepted Answer

The Answer of The Houston Corp. needs to raise money for an addition to its plant. It will issue 250,000 shares of new common stock. The new shares will be priced at $50 per share with a 9% spread on the offer price. Additional registration costs will be $150,000. Presently, Houston Corp. has earnings of $3 million and 700,000 shares outstanding.
a) Compute the potential dilution from this new stock issue.
b) Compute the net proceeds to Houston Corp.
c) What rate of return must be earned on the net proceeds of the new issue so that no dilution of earnings per share occurs? You may ignore the effect of the costs of the new issue on the numerator used in the earnings-per-share calculation by assuming it's been accrued already for purposes of the "before and after" calculation.