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 has earnings of $3 million and 750,000 shares outstanding.

a) Compute the potential dilution from this new stock issue.

Round your answer to the nearest penny and omit the dollar sign.

b) Compute the net proceeds to Houston Corp.

Round the answer to the nearest whole dollar and omit the dollar sign and commas (ex: $12,500,000.23 would be entered as "12500000" without the quotation marks).

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

Omit the percent sign and take the answer to two decimal places (ex: 5.643% would be entered as "5.64" without the quotation marks).

Explanation / Answer

a) Existing EPS = 3000000 / 750000 = 4

EPS after new share issue = 3000000 / (750000 + 300000) = 2.86

b) Net proceeds = Offer price * No of sahres * (1 - Spread) - Registration cost

= 300000 * 60 * (1 - .085) - 150000

= 16320000

c) Rate of return to be earned = (Existing EPS * No of share issued) /Net proceeds

= ( 4 * 300000) / 16320000

= 7.35%

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