Midland Corporation has a net income of $12 million and 5 million shares outstan

Question

Midland Corporation has a net income of $12 million and 5 million shares outstanding. Its common stock is currently selling for $40 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of $17,955,000. The production facility will not produce a profit for one year, and then it is expected to earn a 12 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for $35 per share with a spread of 5 percent.

  
a. How many shares of stock must be sold to net $17,955,000? (Note: No out-of-pocket costs must be considered in this problem.) (Do not round intermediate calculations and round your answer to the nearest whole number.)

b. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $40)? What will be the price per share immediately after the sale of stock if the P/E stays constant? (Do not round intermediate calculations and round your answers to 2 decimal places.)

c. Compute the EPS and the price (if the P/E stays constant) after the new production facility begins to produce a profit. (Do not round intermediate calculations and round your answers to 2 decimal places.)

Explanation / Answer

Midland Corporation a) Net Amount to be raised $ 17,955,000.00 Net Price of shares issued Public price $                   35.00 Less: Spread @5% $                     1.75 Net Price of shares issued $                   33.25 Number of shares issued=Net amount to be raised/Net price of shares issued 540000 b) Net Income $ 12,000,000.00 Number of shares outstanding 5000000 EPS=Net Income/Number of shares outstanding=($12000000/5000000) $                     2.40 Market Price Per Share $                   40.00 Price Earning Ratio=(Market Price per share/EPS)=($40/$2.4) 16.67 Total shares outstanding after new issue=(5000000+540000) 5540000 EPS after offering=($12000000/5540000) $                     2.17 Price=EPS* Price Earning ratio=($2.17*$16.67) $                   36.10 ROI 12% Net Income+(Additional amount to be raised)*ROI=($12000000+$17955000*12%) $ 14,154,600.00 Total shares outstanding after new issue=(5000000+540000) 5540000 c) EPS after contribution=($14154600/5540000) $                     2.55 Price Earning ratio $                   16.67 Price=EPS* Price Earning Ratio=($2.55*$16.67) $                   42.58

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