Question

Tyson Iron Works is about to go public. It currently has aftertax earnings of $5,200,000, and 4,100,000 shares are owned by the present stockholders. The new public issue will represent 700,000 new shares. The new shares will be priced to the public at $25 per share with a 5 percent spread on the offering price. There will also be $200,000 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.
Calculation of net proceeds to Tyson Iron works
Sale price	$17,500,000	700000*25
Less: Spread @ 5%	-$875,000	17500000*5%
Less: Out of pocket costs	-$200,000
Net proceeds	$16,425,000
b.
Earnings per share = Net income/Number of shares outstanding
Earnings per share	5200000/4100000
Earnings per share before stock issue	$1.27
c.
Earnings per share after stock issue	5200000/(4100000+700000)
Earnings per share after stock issue	$1.08
d.
The total shares outstanding now would be 4800000 shares
Therefore to have earnings per share of $1.27, the company will require after tax earnings of (4800000*1.27)
After tax earnings required	$6,087,804.88
The incremental earnings required would be (6087804.88-5200000)	$887,804.88
Rate of return to be earned	887804.88/16425000
Rate of return to be earned	5.41%
5.41% return must be earned on the net proceeds to produce EPS of $1.27
e.
Required increase in earnings per share	(1.27*1.10)	$1.40
Total earnings required (4800000*1.40)	$6,696,585.37
Incremental earnings required (6,696,585.37 - 5200000)	$1,496,585.37
Rate of return to be earned	14696585.37/16425000
Rate of return to be earned	9.11%
9.11% return must be earned on the net proceeds to produce EPS of $1.40