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What are the Net Proceeds if Northern Airlines goes public?

19. Northern Airlines is about to go public. It currently has aftertax earnings of $6,000,000 and 4,000,000 shares are owned by the present stockholders. The new public issue will represent 300,000 new shares. The new shares will be priced to the public at $18 per share with a 4 percent spread on the offering price. There will also be $100,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to Northern Airlines.

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 10 percent increase in earnings per share during the year of going public.

Solution Preview

a) Net proceeds to Northern Airlines = Public Price*(1-Spread)*No. of shares issued - Out of pocket cost
=18*(1-4%)*300000-100000=$5,084,000

b) EPS before stock issue = 6,000,000/4,000,000=$1.50

c) ...

Solution Summary

The solution determines net proceeds of northern airlines. The earnings per share are calculated.

$2.19