The Presley Corporation is about to go public. It currently has aftertax earning
ID: 2754014 • Letter: T
Question
The Presley Corporation is about to go public. It currently has aftertax earnings of $7,200,000 and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 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 $260,000 in out-of-pocket costs to the corporation. a. Compute the net proceeds to the Presley Corporation. b. Compute the earnings per share immediately before the stock issue. c. Compute the earnings per share immediately after the stock issue. 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. 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.
Explanation / Answer
(‘a) Net Proceeds to the Presley Corporation-
Public Price= $ 25
Spread % = 5 % of Public Price
Proceeds after Spread = 23.75 ($ 25 x 95 %)
No of shares issued
800,000
Net Issue Price
23.75
Net Proceeds from Public
19,000,000
Less: Out of pocket cost
260,000
Net Proceeds to Corporation
18,740,000
(‘b) Earnings per share before New Issue
= Earnings after tax / Number of shares outstanding
= 7200,000/2100,000
Earnings per share= $3.43
(‘C) Earnings per share after New Issue
= Earnings after tax / Number of shares outstanding
= 7200,000/(2100,000+800,000)
Earnings per share= $2.48
(‘d) Earnings before issue = 3.43
Earnings after issue = 2.48
Dilution = 0.95
Therefore to maintain the same earnings of $ 3.43 corporation after tax earnings Required
Required after tax earnings = 2900,000 share x 3.43
Required earnings = 9947,000
Existing Earning= $7200,000
Increase in earnings required = $2747,000
Net Proceeds = $ 18740,000
Rate of return required = 2747,000/18740,000
Rate of return required = 14.66 %
(‘e)
Existing earnings per share
3.43
Increase in earnings required
5 %
Required Earnings per share
3.60 (3.43 x 1.05)
Total Earnings Required
10440,000
Existing Earnings
7200,000
Additional earnings required
3240,000
Rate of return on new proceeds
3240,000/18740,000
Rate of return
17.29 %
No of shares issued
800,000
Net Issue Price
23.75
Net Proceeds from Public
19,000,000
Less: Out of pocket cost
260,000
Net Proceeds to Corporation
18,740,000
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