19BP_d The Presley Corporation is about... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 5: 19BP_d (page 498)

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.
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.

Short Answer

Expert verified

The rate of return required is 14.66%.

Step by step solution

Information available

After-tax earnings = $7,200,000

Shares outstanding = 2,100,000

Shares issued in new public issue = 800,000 shares

Selling price for new public issue = $25 per share

Spread = 5%

Out-of-pocket costs = $260,000

Net proceeds = $18,740,000

Calculation of net earnings required after stock issue to maintain before issue EPS

The net earnings required is $9,947,000.

$\begin{array}{rcl} Net earnings & = & EPS 脳 Shares outstanding \\ = & $ 3.43 脳 2, 900, 000 \\ = & $ 9, 947, 000 \end{array}$

Calculation of additional earnings required

The additional earnings required is $2,747,000.

$\begin{array}{rcl} Additional earnings & = & Earnings required after stock issue - After tax earnings \\ = & $ 9, 947, 000 - $ 7, 200, 000 \\ = & $ 2, 747, 000 \end{array}$

Calculation of rate of return to be generated on the net proceeds

The rate of return required is 14.66%.

$\begin{array}{rcl} Rate of return & = & \frac{Additional earnings required}{Net proceeds} \\ = & \frac{$ 2, 747, 000}{$ 18, 740, 000} \\ = & 14.66 % \end{array}$

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In \( millions	In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder鈥檚 equity	\)80
Total assets	\(140	Total stockholder鈥檚 equity and liabilities	\)140

In \( millions	In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder鈥檚 equity	\)80
Total assets	\(140	Total stockholder鈥檚 equity and liabilities	\)140

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Short Answer

Step by step solution

Information available

Calculation of net earnings required after stock issue to maintain before issue EPS

Calculation of additional earnings required

Calculation of rate of return to be generated on the net proceeds

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