What is the major impact of share issuance on EPS?

What is the major impact of share issuance on EPS?

• A. EPS declines because the share count increases; net income may rise slightly if cash from issuance earns interest, but the effect is usually minor.
• B. EPS declines due to reduced revenue.
• C. EPS increases because more shares outstanding raise overall earnings.
• D. EPS remains unchanged despite share issuance.

Answer: (A)

The main idea here is dilution of earnings per share (EPS) when new shares are issued. EPS equals net income divided by the weighted average number of shares outstanding. If the company issues more shares, the denominator increases. Unless the additional capital from the issuance generates enough extra net income to rise in step with those more shares, EPS will fall. The cash raised can help grow earnings, but that effect is usually small compared to the dilution from the higher share count, so the typical outcome is a decline in EPS or, at best, only a modest change. That’s why increasing shares tends to dilute per-share profits rather than boost them. The other options misstate the relationship: issuing shares doesn’t directly reduce revenue, and simply having more shares does not raise EPS, and EPS isn’t guaranteed to stay unchanged.

The main idea here is dilution of earnings per share (EPS) when new shares are issued. EPS equals net income divided by the weighted average number of shares outstanding. If the company issues more shares, the denominator increases. Unless the additional capital from the issuance generates enough extra net income to rise in step with those more shares, EPS will fall. The cash raised can help grow earnings, but that effect is usually small compared to the dilution from the higher share count, so the typical outcome is a decline in EPS or, at best, only a modest change. That’s why increasing shares tends to dilute per-share profits rather than boost them. The other options misstate the relationship: issuing shares doesn’t directly reduce revenue, and simply having more shares does not raise EPS, and EPS isn’t guaranteed to stay unchanged.