Chapter 5: 2BP (page 495)

The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of $6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at $30 per share.
a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.
b. Should the new issue be undertaken based on earnings per share?

Short Answer

Expert verified

a. Earnings per share is $1.382.

b. Yes, the new issue should be undertaken.

Step by step solution

Computation of earnings per share

$E a r n i n g p e r s h a r e = \frac{E a r n i n g s}{S h a r e s o u t s \tan d i n g + A d d i t i o n a l s h a r e s} = \frac{$ 6, 910, 000}{4, 000, 000 + 1, 000, 000} = $ 1.382$

Computation of growth in EPS

$N e w i n c o m e = E x p e c t e d e a r n i n g s (A d d i t i o n a l s h a r e s \times v a l u e p e r s h a r e) = 7 % (1, 000, 000 \times $ 30) = $ 2, 100, 000 T o t a l i n c o m e = N e w i n c o m e + P r e v i o u s i n c o m e = $ 2, 100, 000 + $ 6, 910, 000 = $ 9, 010, 000 N e w e a r n i n g s p e r s h a r e = \frac{T o t a l i n c o m e}{O u t s \tan d i n g s t o c k + A d d i t i o n a l i s s u e} = \frac{$ 9, 010, 000}{5, 000, 000} = $ 1.802 G r o w t h i n E P S = N e w E P S - O l d E P S = $ 1.802 - $ 1.382 = $ 0.42$ Conclusion:Hence, the new issue should be undertaken because earnings per share will grow by $0.42.

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

Short Answer

Step by step solution

Computation of earnings per share

Computation of growth in EPS

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