The company wishes to raise $100 million by issuing stock.The current market pri

ID: 2371998 • Letter: T

Question

The company wishes to raise $100 million by issuing

stock.The current market price is $15

per share, however, if issued the price will drop to $12.50 per

share. How many shares will need to be

issued if under writing is 5% per share?

If there are currently 600,000 shares outstanding, with an EPS of

.25 cents per share, how will this affect the EPS if net income

remains unchanged? If the company has a

standard practice of paying a dividend of .10 cents per share, once

a year, what will be the change in dividends

paid?Assuming an effective tax rate of

30% what would be the tax savings?Ã‚

Issue price $15

Underwriteing is 5% per share

So Net proceed per share = 15*(1-5%) = 14.25

So No of shares to be issued =100,000,000/14.25 = 7,017,544 shares ..........Ans (a)

Current EPS = 0.25 for 600,000 shares

SO Total Earning = 600000*0.25 = $150,000

Total No of shares = 600,000+7,017,544 = 7,617,544

SO New EPS = $150,000/7617544 =0.020 cent per share

...Ans (b)

Payout Ratio = DIv/EPS = 0.10/0.25 = 40%

So New Div will be EPS*Pyout ratio = 0.020*40%

= 0.008cent per share

Taxes have no impace on Div etc. They are used only when Debt is raised.