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A company with 2 million shares outstanding and no debt currently has a net income of $4 million. The company is considering an investment that will cost $3 million and increase net income by $900,000. The company's stock sells for $10 per share but its book value per share is $20. Assume a constant price-earnings ratio. 1. Does dilution take place? 2. What would the new net income for the company have to be for the stock price to remain unchanged?

A company with 2 million shares outstanding and no debt currently has a net income of $4 million. The company is considering an investment that will cost $3 million and increase net income by $900,000. The company's stock sells for $10 per share but its book value per share is $20. Assume a constant price-earnings ratio. 1. Does dilution take place? 2. What would the new net income for the company have to be for the stock price to remain unchanged?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 13P
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A company with 2 million shares outstanding and no debt currently has a net income of $4 million. The company is considering an investment that will cost $3 million and increase net income by $900,000. The company's stock sells for $10 per share but its book value per share is $20. Assume a constant price-earnings ratio. 1. Does dilution take place? 2. What would the new net income for the company have to be for the stock price to remain unchanged?
Transcribed Image Text:A company with 2 million shares outstanding and no debt currently has a net income of $4 million. The company is considering an investment that will cost $3 million and increase net income by $900,000. The company's stock sells for $10 per share but its book value per share is $20. Assume a constant price-earnings ratio. 1. Does dilution take place? 2. What would the new net income for the company have to be for the stock price to remain unchanged?
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