Newdex has net income of $3,000,000 (INCLUDING the effect of expected out-of-pocket costs) and 1,000,000 shares outstanding. It needs to raise $5,000,000 in funds for a new asset. Its investment banker plans to sell an issue of common stock to the public for $40, less a spread of 10%. How much must Newdex's after-tax income increase by to prevent dilution of earnings per share?
A) $40,000
B) $416,667
C) $350,000
D) $375,000

Question

Quizplus · Accepted Answer

EPS before stock issue = $3,000,000/1,000,000 shares = $3.00
Shares to be sold = $5,000,000/($40 − $4) = 138,889 shares
(1,000,000 + 138,889) shares × $3 current EPS = Net income of $3,416,667
Incremental net income = $3,416,667 − $3,000,000 = $416,667

Newdex Has Net Income of $3,000,000 (INCLUDING the Effect of Expected