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A Corporation is about to go public. It currently has after-tax earnings of $7.5 million and 2.5 million shares are owned by the present stockholders. The new public issue will represent 600,000 new shares. The new shares will be priced to the public at $20 per share, with a 5 percent spread on the offering price. There will also be $200,000 in out-of-pocket costs to the corporation.
a. Compute the net proceeds to the Corporation.
b. Compute the earnings per share immediately before the stock issue.
c. Compute the earnings per share immediately after the stock issue.
d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.
e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 5 percent increase in earnings per share during the year of going public.
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Solution Summary
The solution explains the calculations relating to new issue of stock.
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a. Compute the net proceeds to the Corporation.
The new issue is 600,000 new shares and the price is $20 per share. The total issue size is 600,000 X 20 = 12,000,000.
The spread is 5% of the offer = 12,000,000 x 0.05=600,000
Out of pocket costs are 200,000
The net proceeds to Conely Corporation are 12,000,000 - 600,000-200,000=11,200,000
the spread is the difference between the issue price and the amount given to the issuer. It is kept by the underwriters.
The price to ...
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