Question

The Presley Corporation is about to go public. It currently has aftertax earnings of $6,300,000, and 3,700,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 400,000 new shares. The new shares will be priced to the public at $15 per share, with a 6 percent spread on the offering price. There will also be $230,000 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

Solution:
a.	Net proceeds to the Presley Corporation	5,410,000
Working Notes:
	Net proceeds to the Presley Corporation
	Proceeds before out-of-pocket costs	5,640,000	A
	[ No of shares issued x Issue price]
	[ 400,000 x $14.10]
	Less: Out of pocket costs	230,000	B
	Net proceeds	5,410,000	C=A-B
Notes:	Issue price = Price x (1-spread rate)
	Issue price = $15 x (1-6%)
	Issue price = $15 x (1-0.06)
	Issue price = $14.10
b.	Earnings per share immediately before the stock issue	$1.70 per share
Working Notes:
	Earnings per share immediately before the stock issue	= Earning after tax earnings / No of shares outstanding before new issue
		= $6,300,000 / 3,700,000
		= 1.702702703
		=$1.70 per share
c.	Earnings per share immediately after the stock issue	$1.54 per share
Working Notes:
	Earnings per share immediately after the stock issue	= Earning after tax earnings / No of shares outstanding after new issue
		= $6,300,000 / 4,100,000
		= 1.536585366
		=$1.54 per share
	No of shares outstanding after new issue	= No of shares outstanding before new issue + No of share issued
		=3,700,000 + 400,000
		=4,100,000
d.	Rate of return must be earned on the net proceeds	12.59%
Working Notes:
	Rate of return must be earned on the net proceeds	=Incremental earnings/Net proceeds
	Incremental earnings = EPS before issue x no of share after issue - current Earnings after tax
	Incremental earnings = (($6,300,000 / 3,700,000) x 4,100,000) - 6,300,000
	Incremental earnings =681,081.081081
	Net proceeds = $5,410,000 as calculated above
	Rate of return must be earned on the net proceeds	=Incremental earnings/Net proceeds
		=681,081.081081/5410000
		=0.125892991
		=12.59%
e.	rate of return must be earned for 5 percent increase in earnings per share during the year of going public.	19.04%
Working Notes:
	Rate of return must be earned for 5 percent increase in earnings per share during the year of going public.	=Incremental earnings/Net proceeds
	Incremental earnings = EPS before issue x (1+ 5%) x no of share after issue - current Earnings after tax
	Incremental earnings = (($6,300,000 / 3,700,000) x 1.05x 4,100,000) - 6,300,000
	Incremental earnings =$1,030,135.135135
	Net proceeds = $5,410,000 as calculated above
	Rate of return must be earned on the net proceeds	=Incremental earnings/Net proceeds
		=$1,030,135.135135/5410000
		=0.190413149
		=19.04%
Please feel free to ask if anything about above solution in comment section of the question.