Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock at $22 to the public. Maxwell will receive $19 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) $1.86
B) $1.38
C) $1.77
D) No dilution occurs since new money is received by Maxwell.

Question

Quizplus · Accepted Answer

The dilution in earnings per share (EPS) is calculated by first determining the new total number of shares after the offering, which is 1,000,000 + 450,000 = 1,450,000 shares. The current earnings are $6 million. The new EPS is $6,000,000 / 1,450,000 = $4.14. The original EPS was $6,000,000 / 1,000,000 = $6.00. The dilution is $6.00 - $4.14 = $1.86.