Presley Corp is going public current after tax earnings are 7,900,000 and 2,800,

Question

Presley Corp is going public current after tax earnings are 7,900,000 and 2,800,000 share are owned by present stockholders . The new public offering represents 600,000 new share sthe new shares will be priced to the public at $20 a share with a 4% spread on the offering price there will be 210,000 in out of pocket cost tot he corporation

a=Compute net proceeds to the presley corp

b=Compute EPS immediatly before the stock issue

c=Compute the earnings per share immediatly after the stock issue

d= determine what rate of return must be earned on the net proceeds to the corporation so there will be a dilution of earnings per share during the  year going public

e=determine what rate of return must be earned on the proceeds of the corporation so there will be 5% increase in EPS during the year going public (round answers to 2 decimal places  

Explanation / Answer

spread = 20 *4% = 0.8

spred = 20 -0.8 = 19.2

net proceeds befor out of pocket expense = 19.2 * 600000 = 11520000

total net proceeds = 11520000 - 210000 = 11310000

b) earnings per share = 7900000/2800000 = 2.82

c) earnings per share = 7900000/3400000 = 2.32

d) incremental earnings = 3400000 * 2.82 - 7900000 = 1688000

required rate of retiurn = 1688000/11310000 = 14.92%

e) incremental earnings = 3400000 * 2.82 * 1.05 - 7900000 = 2167400

rate of return = 2167400/11310000 = 19.16%

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