American Health Systems currently has 5,800,000 shares of stock outstanding and

Question

American Health Systems currently has 5,800,000 shares of stock outstanding and will report earnings of $18 million in the current year. The company is considering the issuance of 1,400,000 additional shares that will net $20 per share to the corporation.

What is the immediate dilution potential for this new stock issue? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Assume that American Health Systems can earn 8 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.)

American Health Systems currently has 5,800,000 shares of stock outstanding and will report earnings of $18 million in the current year. The company is considering the issuance of 1,400,000 additional shares that will net $20 per share to the corporation.

Explanation / Answer

a. Immediate Dilution Potential = 18,000,000 / (5,800,000 + 1,400,000) = $2.50 per share

b-1. New Earnings = 18,000,000 + (1,400,000 x 20 x 8%) = $20,240,000
New EPS = 20,240,000 / (5,800,000 + 1,400,000) = $2.81 per share

b-2. Old EPS = 18,000,000 / 5,800,000 = $3.10 per share
No, the new issue should not be undertaken based on earnings per share since the EPS is falling from $3.10 to $2.81

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