20BP_d Tyson Iron Works is about to go ... [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: 20BP_d (page 499)

Tyson Iron Works is about to go public. It currently has after-tax earnings of $4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at $25 per share with a 3 percent spread on the offering price. There will also be $280,000 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 4.38%.

Step by step solution

Information available

After-tax earnings = $4,400,000

Shares outstanding = 4,200,000

Shares issued in new public issue = 500,000 shares

Selling price for new public issue = $25 per share

Spread = 3%

Out-of-pocket costs = $280,000

Net proceeds = $11,845,000

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

The net earnings required is $4,920,900.

$\begin{array}{rcl} Net earnings & = & EPS 脳 Shares outstanding \\ = & $ 1.047 脳 4, 700, 000 \\ = & $ 4, 920, 900 \end{array}$

Calculation of additional earnings required

The additional earnings required is $520,900.

$\begin{array}{rcl} Additional earnings & = & Earnings required after stock issue - After tax earnings \\ = & $ 4, 920, 900 - $ 4, 400, 000 \\ = & $ 520, 900 \end{array}$

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

The rate of return required is 4.38%.

$\begin{array}{rcl} Rate of return & = & \frac{Additional earnings required}{Net proceeds} \\ = & \frac{$ 520, 900}{$ 11, 845, 000} \\ = & 4.38 % \end{array}$

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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

Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders鈥� equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder鈥檚 equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder鈥檚 equity	\)15,680,000
Total liabilities and stockholder鈥檚 equity	$28,650,000

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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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