The Carma S. Diego Travellers Corp. has 10 million shares of stock outstanding at a current market price of $10. It is considering a new share offering that will net it $9 a share on 1 million shares. Earnings this year are expected to be $18 million.
a. What is the immediate dilution potential for this new share issue?
b. Assume Carma S. Diego Travellers Corp. can earn 12 percent on the proceeds of the share issue and these can be realized with this year's results. Should the new issue be undertaken based on earnings per share? Can you suggest why or why not?
c. If the 1 million additional shares can be issued to net $16 per share and the company can earn 12 percent on the proceeds, should the new issue be undertaken based on earnings per share?