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Chapter 5: 18BP_d (page 498)

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

d. Compute the EPS and the price (P/E stays constant) after the new production facility begins to produce a profit.

Short Answer

Expert verified

The EPS is $4.83 and the stock price is $48.83 after the new facility starts generating profit.

Step by step solution

01

Information available

Net income = $19,000,000

Shares outstanding = $4,000,000

Present selling price = $48 per share

ROI =13 %

Selling price for public issue = $44 per share

Spread = 4%

EPS = 10.1 times

02

Calculation of earnings of the company from the new facility

The earnings from the new facility is $2,745,600.

Additionalincome=ROI脳Costofnewfacility=13%脳$21,120,000=$2,745,600

03

Calculation of EPS after the new facility starts generating profit

The earnings per share is $4.83.

EPS=EarningsStockOutstanding=$19,000,000+$2,745,6004,000,000+500,000=$4.83

04

Calculation of stock price of the company after new facility starts generating profit

The stock price is $48.83.

Pricepershare=PE脳Earningspershare=10.1脳$4.83=$48.83

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Most popular questions from this chapter

The Presley Corporation is about to go public. It currently has after-tax 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.

b. Compute the earnings per share immediately before the stock issue.

What is privatization?

The Presley Corporation is about to go public. It currently has after-tax 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.

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.

Question: The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders鈥� claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder鈥檚 claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder鈥檚 claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder鈥檚 claims

\)900,000

Total liabilities and stockholder鈥檚 claims

$8,500,000

e. List the remaining asset claims of unsatisfied secured debt holders and unsecured debt holders in a manner similar to that shown at the bottom portion of Table16A-3.

What method of 鈥渂ond repayment鈥� reduces debt and increases the amount of common stock outstanding? (LO16-3)
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