Question

The Presley Corporation is about to go public. It currently has aftertax earnings of $7,700,000, and 2,300,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 900,000 new shares. The new shares will be priced to the public at $20 per share, with a 3 percent spread on the offering price. There will also be $240,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to the Presley Corporation. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
  

b. Compute the earnings per share immediately before the stock issue. (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. Compute the earnings per share immediately after the stock issue. (Do not round intermediate calculations and round your answer to 2 decimal places.)

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. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  

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. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Given-

Earnings after tax=$7700000

Present stock=2300000 shares

New shares=900000 shares@20 per share with 3% spread

Out of pocket cost=$240000

1. Compututation of the net proceeds to the Presley Corporation

Net proceed= {public price (1-spread)} ×no of new share}-cost

=20(1-.03) ×900000-240000

=$17220000

2. Compute the earnings per share immediately before the stock issue.

Earnings per share=Earnings after tax/number of shares

       =7700000/2300000

        =$3.34782

3. Computation of the earnings per share immediately after the stock issue=

Earnings per share=Earnings after tax/number of shares

Number of share after issue=2300000+900000=3200000

Earnings per share=7700000/3200000

                            =$2.40625

4. Computation of 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

New required earning after tax=earnings per share before dilution×total number of shares

=3.34782×3200000

=10713024

Rate of return=new required earning after tax-current earning after tax/net proceed

=10713024-7700000/17220000

=17.49723%

5.computation of 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=

Required earning= {earnings per share pre issue (1+rate of increase)} ×total number of share

=3.34782(1+.05) ×3200000

=11248675.2

Required rate of earning= new required earning after tax-current earnings after tax/net proceed

=11248675.2-7700000/17220000

=20.60789%