Problem: Becker Brothers is the managing underwriter for a 1-million-share issue by Jay's Hamburger Heaven. Becker Brothers is "handling" 10 percent of the issue. Its price is $25 per share and the price to the public is $26.40.
Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 40,000 shares in the open market at an average price of $25.75. They later sell the shares at an average value of $23.
Compute Becker Brothers' overall gain or loss from managing the issue.
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 that will net $50 per share to the corporation.
What is the immediate dilution potential for this new stock issue?
Assume that American Health Systems can earn 12 percent 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?