Problem:
Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of $9 million in the current year. The company is considering the issuance of 1 million additional shares that will net $40 per share to the corporation.
Required:
Question 1: What is the immediate dilution potential for this new stock issue?
Question 2: Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include them in the current year's results. What is the new earnings per share?
Question 3: Should the new issue be undertaken based on earnings per share?
Note: Be sure to show how you arrived at your answer.