Problem:
American Health Systems currently has 6,000,000 shares of stock outstanding and will report earnings of $15 million in the current year. The company is considering the issuance of 1,500,000 additional shares the will net $50 per shares to the corporation.
Required:
Question 1: What is the immediate dilution potential for this new stock issue?
Question 2: Assume that American Health Systems can earn 12% on the proceeds of the stock issue in time to include them in the current year's results. Should the new issue be undertaken based on earnings per share?
Note: Provide support for rationale.