The Houston Corp. needs to raise money for an addition to its plant. It will issue 300,000 shares of

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%

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

The potential dilution refers to the decrease in EPS due to the new issue.
Current EPS = 3,000,000/750,000=$4.00
After the new issue the number of shares will be 750,000+300,000=1,050,000
EPS after the issue = 3,000,000/1,050,000 = $2.86
Potential dilution = 4.00-2.86 = $1.14

(b) Compute the net proceeds to Houston Corp. N

Net proceeds = Total cash raised – spread – registration costs
The net proceeds = 300,000X60 – 300,000X60X8.5%-150,000
Net Proceeds = $16,320,000

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

The EPS from the new issue should be $4.00 so that there is no dilution
EPS = Net Income/Number of shares
Net Income = 4 X 300,000=1,200,000
The rate of return should be 1,200,000/16,320,000 = 7.35%