Question

American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000 additional shares, which can only be issued at $18 per share.

  

a. Assume that American Health Systems can earn 6 percent on the proceeds. Calculate 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?

  

• Yes

• No

Answer 1

Answer :-

In the question it was given that -

Stock outstanding = 6,400,000 shares

Earnings = $10,000,000

Additional shares = 1,700,000 shares

New share issued price = $18

Earning rate on additional share = 6%

First we calculate the Earning per share before additional share.

Earning per share = Earnings / Stock outstanding

Earning per share = $10,000,000 / 6,400,000 shares

Earning per share = $1.56

Now we calculate the Earning per share after additional share issued.

Earnings on additional shares = ( Additional share × New share issued price ) × 6%

Earning on additional share = (1,700,000 shares × $18 ) × 6%

Earning on additional share = $1,836,000

New Earnings = Earning + Earning on additional share

New Earnings = $10,000,000 + $1,836,000

New Earnings (Earnings After additional share) = $11,836,000

Earning per share = New Earnings / (Share outstanding + Additional share)

Earning per share = $11,836,000 / (6,400,000 shares + 1,700,000 additional share )

Earning per share = $1.46 per share

No, the new issue be undertaken based on earnings per share. As the Earning per share before additional shares issued is $1.56 and Earning per share after additional shares issued is $1.46.

When Company issued additional share the Earning per share would reduce. Therefore , the new issue would not undertaken.