Question

In: Finance

Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock...

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 one million shares outstanding and earnings of $6 million before recording the new issue. What is the amount of dilution in earnings per share? Hint: flotation costs reduce earnings.

a) $1.38

b) $1.77

c) $2.79

d) No dilution occurs since new money is received by Maxwell

Solutions

Expert Solution

- Net Income or earnings before recording the new issue = $6,000,000

Earnings per share before recording the new issue = Earnings/No of shares outstanding = $6000,000/1000,000

= $6

- Maxwell will issue new offering of 450,000 shares at $22 to public however will receive only $19 due to the difference being flotation cost

Total Flotation Cost = 450,000 shares*($22 - $19) = $1350,000

- Net Income or earnings after the flotation cost =$6,000,000 - $1350,000 = $4650,000

Number of shares after new offering = 1,000,000 shares + 450,000 shares = 1450,000 shares

- Earnings per share after recording the new issue = Net Income or earnings after the flotation cost/Number of shares after new offering

= $4650,000/1450,000

Earnings per share after recording the new issue = $3.21

So, Dilution in earnings per share = Earnings per share before recording the new issue - Earnings per share after recording the new issue

Dilution in earnings per share = $6 - $3.21

Dilution in earnings per share = $2.79

Option C

If you need any clarification, you can ask in comments.    

If you like my answer, then please up-vote as it will be motivating       

jeff jeffy answered 3 years ago
Next > < Previous

Related Solutions

Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock...
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 one million shares outstanding and earnings of $6 million before recording the new issue. What is the amount of dilution in earnings per share? $1.77 $6.00 $1.38 $1.86
Dan Corp issues 3,000 shares of 10%, preferred stock. The Cash amount is $450,000; in this...
Dan Corp issues 3,000 shares of 10%, preferred stock. The Cash amount is $450,000; in this case the market value is: * $10 $100 $120 $150 On July 1, 2019, Alex Company borrows $30,000 from City Bank and signs a 4- months, 5%, $30,000 interest bearing note. Interest Expense is: * $500 $800 $30,500 $30,800 Lili Company’s products are subject to a 1-year warranty. During 2019, the company sold 300,000 units, of which the company estimates 4% will be defective....
Lara’s Inc. is currently an unlevered firm with 450,000 shares of stock outstanding, with a market...
Lara’s Inc. is currently an unlevered firm with 450,000 shares of stock outstanding, with a market price of $15 a share. The company has earnings before interest and taxes of $314,000. Lara's met with his bankers, Warne Incorporated and agreed to borrow $825,000, at 5 percent. You are an ardent investor and you currently own 20,000 shares of Lara's stock. If you seek to unlevered your position; how many shares of Lara's stock will you continue to own, if you...
Luther Industries sold 10 million shares of stock in a seasoned equity offering. The market price...
Luther Industries sold 10 million shares of stock in a seasoned equity offering. The market price of Luther at the time was $25 per share. Of the 10 million shares sold, 6 million shares were primary shares being sold by the company, and the remaining 4 million shares were being sold by venture capitalists. Luther's underwriters charges 5% of the total funds raised as an underwriting fee. (a) How much money did Luther Industries company raise? (4 pts.) (b) How...
An investor owns a portfolio consisting of $450,000 of IBM shares and $550,000 of Apple shares. Apple shares have a market inde
An investor owns a portfolio consisting of $450,000 of IBM shares and $550,000 of Apple shares. Apple shares have a market index beta of 1.2 whereas IBM shares have a market index beta of 0.9. The investor wishes to take a risk-minimizing hedge for this portfolio using S&P 500 index futures. The current futures prices for the S&P500 index is $2600.00 and the futures contract is for 10 units of the index. What position should the investor take in the...
The Belfast Corp. has 40 million shares of common stock with a current market price of...
The Belfast Corp. has 40 million shares of common stock with a current market price of $14.00 per share. They have $270 million in par value of long-term bonds outstanding that currently sell for $935 per $1,000 par value. The bonds have a coupon rate of 7.6% and a maturity of 20 years. Assume annual coupon payments. Horizon also has 1 million shares of preferred stock with a current market price of $108 per share. The dividend on this preferred...
The Horizon Corp. has 60 million shares of common stock with a current market price of...
The Horizon Corp. has 60 million shares of common stock with a current market price of $24.00 per share. They have $400 million in par value of long-term bonds outstanding that currently sell for $1,075 per $1,000 par value. The bonds have a coupon rate of 8.5% and a maturity of 20 years. Assume semi-annual coupon payments. Horizon also has $220 million in par value of preferred stock with a current market price of $108 per $100 of par value....
The Centurion Corp. has 3 million shares of common stock with a current market price of...
The Centurion Corp. has 3 million shares of common stock with a current market price of $76.00 per share. The most recent dividend paid (i.e., D0) on these shares was $2.90. The growth rate for Centurion has been 7.2% in the past and is expected to continue in the future. Centurion has a beta of 1.3, the risk-free rate is 3.6%, and the return on the market is 10.1% Assume Centurion has $130 million in par value of long-term bonds...
Raymond Mining Corporation has 10.1 million shares of common stock outstanding, 450,000 shares of 5% $100...
Raymond Mining Corporation has 10.1 million shares of common stock outstanding, 450,000 shares of 5% $100 par value preferred stock outstanding, and 175,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $49 per share and has a beta of 1.55, the preferred stock currently sells for $98 per share, and the bonds have 15 years to maturity and sell for 116% of par. The market risk premium is 8.9%, T-bills are yielding 4%, and...
2. The Horizon Corp. has 60 million shares of common stock with a current market price...
2. The Horizon Corp. has 60 million shares of common stock with a current market price of $24.00 per share. They have $400 million in par value of long-term bonds outstanding that currently sell for $1,075 per $1,000 par value. The bonds have a coupon rate of 8.5% and a maturity of 20 years. Assume semi-annual coupon payments. Horizon also has $220 million in par value of preferred stock with a current market price of $108 per $100 of par...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT