The Hamilton Corporation has 3 million shares of stock outstanding and will report earnings of $6,880,000...

The Hamilton Corporation has 3 million shares of stock outstanding and will report earnings of $6,880,000 in the current year. The company is considering the issuance of 3 million additional shares that can only be issued at $33 per share.

a. Assume the Hamilton Corporation can earn 6.00 percent on the proceeds. Calculate the earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.)

b. Should the new issue be undertaken based on earnings per share?

Solutions

Expert Solution

The immediate dilution potential for the new stock will be calculated by finding the difference between earnings per share before stock issue and earnings per share after the stock issue.

Calculate the earnings per share before the stock issue:

EPS = total earning/number of shares

= $6880000/3000000

= $2.2933

Calculate the EPS after the stock issue;

EPS = $6880000/(3000000+3000000)

= $1.1467

Therefore, the amount of dilution will be $1.1466 i.e. (2.2933-1.1467)

The company earns 6 percent on the proceeds of stock issue. The stock can be issued at the price of $33 per share. The new income after the issuance of new share will be computed as follows:

New income = 6% × (3000000×$33) = $5940000

Total income = net income + total earning

= $6880000+$5940000

= $12820000

New EPS = $12820000/6000000

= $2.1367

therefore the new EPS = $2.14

B) As the EPS has decreased from $2.29 to $2.14, hence the new issue should not be undertaken

PLEASE DO GIVE A THUMBS UP I REALLY NEED IT

jeff jeffy answered 1 month ago

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