Question

The Presley Corporation is about to go public. It currently has aftertax earnings of $5,700,000 and 3,100,000 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 $35 per share, with a 4 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

(a) Compute the net proceeds to the Presley Corporation. (Omit the "$" sign in your response.)
Net proceeds $
(b) Compute the earnings per share immediately before the stock issue. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Earnings per share $
(c) Compute the earnings per share immediately after the stock issue. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Earnings per share $
(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. (Round your intermediate and final answer to 2 decimal places. Omit the "%" sign in your response.)
Rate of return %
(e) Determine what rate of return must be earned on the proceeds to the corporation so there will be a 5 percent increase in earnings per share during the year of going public. (Round your intermediate and final answer to 2 decimal places. Omit the "%" sign in your response.)
Rate of return %

Answer 1

The Presley Corporation's financial considerations for going public include calculating net proceeds, earnings per share before and after the public offering, and the rate of return required to avoid EPS dilution and to achieve a 5 percent increase in EPS.

Step-by-step explanation:

The Presley Corporation is calculating various financial metrics associated with going public, including net proceeds, earnings per share (EPS) before and after the stock issue, and the required rates of return to avoid dilution and to achieve a 5 percent increase in EPS.

1. To calculate the net proceeds, we need to subtract the spread and out-of-pocket costs from the gross proceeds. The gross proceeds are the number of new shares multiplied by the offering price. Then we calculate the spread by applying the 4 percent to the gross proceeds and subtract it along with the out-of-pocket costs. The formula for net proceeds is: Net proceeds = (Offering price * Number of new shares) - (Spread percentage * Offering price * Number of new shares) - Out-of-pocket costs.
2. Earnings per share (EPS) before the stock issue is simply the after tax earnings divided by the number of shares owned by the present stockholders.
3. EPS after the stock issue takes the same after tax earnings but divides it by the total number of shares after the public issue has been added.
4. To determine the required rate of return on the net proceeds to avoid dilution of EPS, we compare the EPS before and after the stock issue, and set up an equation to solve for the rate of return that maintains the pre-issue EPS. This involves factoring in the additional earnings required to offset the increase in the number of shares.
5. For a 5 percent increase in EPS, we follow a similar approach by setting up an equation to solve for the rate of return that results in an EPS that is 5 percent higher than the pre-issue EPS.