1. 9.

Dilution [LO 15.3] Krambach Wines Limited wishes to expand its facilities. The company currently has 6 million shares outstanding and no debt. The shares sell for $64 per share, but the book value per share is $19. Profit for the year is currently $11.5 million. The new facility will cost $30 million, and it will increase profit for the year by $675 000.

1. Assuming a constant price-earnings ratio, what will the effect be of issuing new equity to finance the investment? To answer, calculate the new book value per share, the new profit for the year, the new EPS, the new share price and the new market-tobook ratio. What is going on here?

2. What would the new profit for the year for the company have to be for the share price to remain unchanged?