Question

Tyson Iron Works is about to go public. It currently has aftertax earnings of $5,500,000, and 3,500,000 shares are owned by the present stockholders. The new public issue will represent 800,000 new shares. The new shares will be priced to the public at $10 per share with a 4 percent spread on the offering price. There will also be $300,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to Tyson Iron Works. (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 10 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

a)Net proceeds : Shares offered *price(1-spread) - issue cost =[800,000 * 10 (1-0.04)] - 300,000

= 7,380,000

b)EPS =Earning available to common stockholders/shares outstanding

             = 5,500,000/3,500,000

= $1.57 per share

c)Shares outstanding after new issue : 3,500,000+ 800,000 = 4,300,000

EPS : 5,500,000 / 4,300,000 = $ 1.28 Per share

d) EPS before= 5,500,000/ 3,500,000 = 1.57

To maintain EPS of $ 1.57 per share (as before) ,Total earnings after new issue should be :

4,300,000*1.57 = $6,751,000

so net increase in earnings : 6,751,000-5,500,000= 1,251,000

return from new investment = increase in earnings /net proceeds = 1,251,000/7,380,000

                     = 0.16951 or 16.95% of net proceeds.

e) new earnings : 4,300,000*1.57*1.10 = 7,426,100

Increase in earnings : 7,426,100- 5,500,000 = 1,926,100

Return required to have increase in 10% earnings = 1,926,100/7,380,000= 0.26098 or 26.10%