Micromanagement, Inc has 8 million shares of stock outstanding and will eport earnings of $20 million in the current year. The company is considering the issuance of 2 million additional shares that will net $30 per share to the corDor a. What is the immediate dilution potential for this new stock issue? b. Assume that Micromanagement can earn 12.5 percent on the proceeds of the stock issue in time to include it in the current year,s results. Should the new issue be undertaken based on earnings per share? Solution: Micromanagement Inc. a. Earnings per share before stock issue $20,000,000/8,000,000=$2.50 Earnings per share after stock issue $20,00000/1000000=$2.00 dilution $2.50 2.00 S. 50 per share b. Net income=$20,000000.125(2,000,000X$30) =$20,000000.125(s60,000,000 $20000.000+$7,500,000 $27,500,000 Earnings per share after additional income EPS=$27,500,000/10,000,000 $2.75 Yes, the eps of $2. 75 is higher than $2. 50 S-529 Copyright C2005 by The McGra-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-529 15-3. Micromanagement, Inc. has 8 million shares of stock outstanding and will report earnings of $20 million in the current year. The company is considering the issuance of 2 million 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 Micromanagement can earn 12.5 percent on the proceeds of the stock issue in time to include it in the current year's results. Should the new issue be undertaken based on earnings per share? Solution: Micromanagement, Inc. a. Earnings per share before stock issue $20,000,000/8,000,000 = $2.50 Earnings per share after stock issue $20,000,000/10,000,000 = $2.00 dilution $2.50 2.00 $ .50 per share b. Net income = $20,000,000 + .125 (2,000,000 x $30) = $20,000,000 + .125 ($60,000,000) = $20,000,000 + $7,500,000 = $27,500,000 Earnings per share after additional income EPS = $27,500,000/10,000,000 = $2.75 Yes, the EPS of $2.75 is higher than $2.50