The Presley Corporation is about to go public. It currently has aftertax earning

Question

The Presley Corporation is about to go public. It currently has aftertax earnings of $5,500,000, and 2,700,000 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 $30 per share, with a 6 percent spread on the offering price. There will also be $150,000 in out-of-pocket costs to the corporation.

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

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

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

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.)

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.)

The Presley Corporation is about to go public. It currently has aftertax earnings of $5,500,000, and 2,700,000 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 $30 per share, with a 6 percent spread on the offering price. There will also be $150,000 in out-of-pocket costs to the corporation.

Explanation / Answer

Given after tax earnings =$5,500,000

Number of shares before the issue=2,700,000

Proposed number of shares to be issued=400,000.

Price of the proposed new share=$30.

Given out of pocket expenses=$150,000.

Answer for question no.a.

Number of shares being issued=400,000.

Price of the new share=$30.

Given spread is 6%.

S0, the amount received on sale of shares=400,000*($30-$30*6%)

=400,000*28.2

=11280000.

However, certain costs are incurred on issue of the share and it is equal to $150,000.

So, inorder to arrive at the net proceeds the costs needs to be deducted from the proceeds of the new issue ie.,=$11,280,000-$150,000

=$11,130,000.

Answer for question no.b:

Given after tax earnings =$5,500,000

Number of shares before the issue=2,700,000

Earnings per share=Profit after tax/Number of shares

=$5,500,000/2,700,000

=$2.037 rounded to $2.04

Answer for question no.c:

Given after tax earnings =$5,500,000

Number of shares after the issue=2,700,000+400,000

=3,100,000

Earnings per share immediately after the issue=$5,500,000/3,100,000

=$1.77.

Answer for question no.d:

Earnings per share before the issue=$2.04.

Number of shares after the issue=3,100,000.

Formula for earnings per share=Earnings after tax/Number of shares

$2.04=Earnings after tax/3,100,000.

Earnings after tax=3,100,000*$2.04

=$6,314,814.81.

Answer for question no.e:

Earnings per share=$2.04.

Expected earnings per share=$2.04*105%

=$2.142.

Therefore expected total earnings after tax to earn an EPS of $2.142 =$2.142*3,100,000

=$6,640,200.

Incremental earnings=$6,640,200-$5,500,000

=$1,140,200.

Rate of return that must be earned=$1,140,200/$11,130,000

=10.24%.

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