The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of $6,000,000 in the current year. The company is considering the issuance of 1 million additional shares that will net $30 per share to the corporation.
a. What is the immediate dilution potential for this new stock issue?
b. If the stock has a P/E ratio of 23 immediately after the offering, what will the stock price be?
c. Should the founding stockholders be pleased with the $40 they receive for their shares?