Question

Jordan Broadcasting Company is going public at $47 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering, the firm had $31 million in earnings divided over 8 million shares. The public offering will be for 4 million shares; 2 million will be new corporate shares and 2 million will be shares currently owned by the founding stockholders.

a. What is the immediate dilution based on the new corporate shares that are being offered? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

b. If the stock has a P/E of 20 immediately after the offering, what will the stock price be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

c. Should the founding stockholders be pleased with the $47 they received for their shares?
  

	Yes
	No

Answer 1

a. Immediate dilution after the issue = EPS after the issue.

Earnings Per Share before the issue = 31 million/ 8 million shares = $ 3.875

Earnings Per Share after the issue = 31 million / 10 million shares = $ 3.1

As out of the 4 million shares included in the public offering, only 2 million are new ones, the other 2 million belong to the existing founding share holders. Thus, the founder shares are just exchanging ownership. Thus, new outstanding shares after the public offering = 8 + 2 = 10 million (ignoring the shares of the founding shareholders)

b. Price to Earnings after the offering = 20 and Earnings per share = $ 3.1

Thus the stock Price = P/E * EPS = 20 * 3.1=$ 62

c. No.

By the above calculation, based on a P/E of 20, the intrinsic value of the stock comes out to $ 62 just after the offering. However, the founding shareholders were offered a price of $47 which is less than the intrinsic value based on the P/E. Thus, the founding shareholders would not be pleased with the offered price of $47 and should command a greater price.