The Houston Corp. needs to raise money for an addition to its plant. It will iss

Question

The Houston Corp. needs to raise money for an addition to its plant. It will issue 300,000 shares of new common stock.The new shares will be priced at $60 per share with an 8.5% spread on the offer price. Registration costs will be $150,000. Presently Houston Corp. of $3 million and 750,000 shares outstanding.

A) compute the potential dilution from stock issue.

B) Compute the net proceeds to Houston Corp.

C) What rate of return must be earned on the net proceeds so that no dilution of earnings per occurs?

Explanation / Answer

Direct costs are as follows: Underwriting spread: 8.5%*$60*300,000share =$1,530,000 Other direct costs-Registration cost =$150,000 Total = $1,680,000 a. Current EPS = $3,000,000/750,000 = $4 per share Diluted EPS = $3,000,000/(750000+300000) = $2.86 per share b. Net proceeds = $60*300,000 - DIrect cost = 60*300000 - 1680000 = $1,63,20,000 c. ROR = (Desired EPS*No of new shares)/Net proceeds =($4*300000)/ $1,63,20,000 = 7.35%

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