Question

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?

Answer 1

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

Answer 2

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.