Newdex has net income of $2,500,000 and 1,000,000 shares outstanding. It needs to raise $3,610,000 in funds for a new asset. Its investment banker plans to sell an issue of common stock to the public for $40 per share, less a spread of 5%. How much must Newdex's after-tax income increase to prevent dilution of EPS?
EPS=NI/#shares Outstanding
2,500,000/1,000,000=2.5 ratio
1,000,000(1.05)+(3,610,000/40)=
1050000+90250=1140250 shares
2.5=NI/1140250
NI=2850625
-2500000
Increase in NI=350625
Miles Metals recently reported $11,500 of sales, $4,000 of operating costs other than depreciation, and $1,500 of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a 6% interest rate, and its federal-plus-state income tax rate was 38%. What was the firm's net income after taxes? The company uses the same depreciation for tax and stockholder reporting.
Select the correct answer.
To calculate how much Newdex's after-tax income must increase to prevent dilution of EPS, we need to consider the impact of the new asset and the sale of common stock.
First, let's calculate the number of shares that will be sold by dividing the amount of funds needed by the offer price per share:
Number of shares to be sold = Amount of funds needed / Offer price per share
Number of shares to be sold = $3,610,000 / $40 = 90,250 shares
Next, we need to consider the spread, which is 5% of the offer price per share:
Spread = 5% * Offer price per share
Spread = 0.05 * $40 = $2
Therefore, the actual proceeds from the sale of the shares will be:
Actual proceeds from the sale = Offer price per share - Spread
Actual proceeds from the sale = $40 - $2 = $38
Now, let's calculate the diluted EPS by incorporating the new shares:
Diluted EPS = (Net income + Proceeds from the sale of shares) / (Shares outstanding + Number of new shares)
Diluted EPS = ($2,500,000 + ($38 * 90,250)) / (1,000,000 + 90,250)
Now, since the target is to prevent dilution of EPS, the diluted EPS should be equal to the current EPS. Therefore, we can set up the equation:
Diluted EPS = Current EPS
Solving for Net income, we can rearrange the equation:
Net income = Current EPS * (Shares outstanding + Number of new shares) - Proceeds from the sale of shares
Net income = Current EPS * (1,000,000 + 90,250) - ($38 * 90,250)
Now, let's substitute the given values:
Net income = Current EPS * 1,090,250 - $3,431,500
So, to prevent dilution of EPS, Newdex's after-tax income must increase by $3,431,500.
To determine how much Newdex's after-tax income must increase to prevent dilution of EPS, we need to consider the impact of selling the new shares at a discount.
Let's break down the steps to calculate the required increase in after-tax income:
1. Determine the number of shares to be sold:
The investment banker plans to sell the common stock for $40 per share, with a 5% spread. This means Newdex will receive $40 * (1 - 0.05) = $38 per share.
To raise $3,610,000, the number of shares to be sold is $3,610,000 / $38 = 95,000 shares.
2. Calculate the new total number of shares outstanding:
Currently, Newdex has 1,000,000 shares outstanding. After selling the new shares, the total number of shares outstanding will be 1,000,000 + 95,000 = 1,095,000 shares.
3. Determine the EPS before the new shares are issued:
EPS (Earnings Per Share) is calculated as the net income divided by the number of shares outstanding:
EPS = Net Income / Shares Outstanding
EPS = $2,500,000 / 1,000,000 = $2.50 per share.
4. Calculate the target EPS to prevent dilution:
To prevent dilution, the target EPS should be equal to the EPS before the new shares were issued. Therefore, the target EPS is $2.50 per share.
5. Determine the required after-tax income increase:
The required after-tax income increase can be calculated by multiplying the difference between the target EPS and the current EPS by the new number of shares outstanding:
Required after-tax income increase = (Target EPS - Current EPS) * New Shares Outstanding
Required after-tax income increase = ($2.50 - $2.50) * 1,095,000
Required after-tax income increase = $0 * 1,095,000
Required after-tax income increase = $0
Based on the calculations, Newdex's after-tax income does not need to increase to prevent dilution of EPS since the target EPS is already being maintained.