Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 5: Q4BP (page 495)

Using the information in Problem 3, assume that American Health Systems’ 1,700,000 additional share can only be issued at $18 per share.

  1. Assume that American Health Systems can earn 6 percent on the proceeds. Calculate earnings per share.
  2. Should the new issue be undertaken based on earnings per share?

Short Answer

Expert verified
  1. Earnings per share is $1.4612.
  2. No, the new issue should not be undertaken

Step by step solution

01

Computation of earnings per share

New income=Expected earnings (Additional issue×Value per share)=6%(1,700,000×$18)=6%(30,600,000)=$1,836,000Total incom e=New income+Reported earnings=$1,836,000+$10,00,000=$11,836,000New EPS=Total incomeOutstanding stock + Additional issue=$11,836,0006,400,000+1,700,000=$11,836,0008,100,000=$1.4612

02

Undertaking of a new issue 

EPS before stock issue=EarningsOutstanding stock=$10,000,0006,400,000=$1.5625Decrease in EPS = New EPS-EPS before stock issue=$1.4612-$1.5625=-$0.1013

Conclusion: Hence, the new issue should not be undertaken because EPS will decrease by $0.1013

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

How does the bond rating affect the interest rate paid by a corporation on its bonds?

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

c. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $48)? What will be the price per share immediately after the sale of stock if the P/E stays constant?


What act of Congress created the Securities and Exchange Commission?

Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)

Preferred stock Senior debenture

Subordinated debenture Senior secured debt

Common stock Junior secured debt

American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of \(10 million in the current year. The company is considering the issuance of 1,700,000 additional shares that will net \)30 per share to the corporation.

a. What is the immediate dilution potential for this new stock issue?

b. Assume that American Health Systems can earn 9 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. Should the new issue be undertaken based on earnings per share?
See all solutions

Recommended explanations on Business Studies Textbooks

Managers

Read Explanation

Business Operations

Read Explanation

Corporate Finance

Read Explanation

Business Development

Read Explanation

Nature of Business

Read Explanation

Operational Management

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free