Chapter 15: Investment Banking: Public and Private Placement
3 million shares (P/E EPS)
15–22. (Continued)
c. Total value to the company $103.5 million
Chapter 15: Investment Banking: Public and Private Placement
15-28
CP 15-1. (Continued)
BAILEY CORPORATION
Balance Sheet
As of December 31, 201X
Assets
Current assets
Cash …………………………..……………………… $ 250,000
Marketable securities ……………………………. 130,000
Accounts receivable …………………………….. 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’ 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
Stockholders’ 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 stockholders’ equity ……………………. 15,680,000
Total liabilities and stockholders’ equity ……… $28,650,000
a. Assume that 800,000 new corporate shares will be issued to the general public. What
will earnings per share be immediately after the public offering? (Round to two places
to the right of the decimal point.) Based on the price-earnings ratio of 12 what will the
initial price of the stock be? Use earnings per share after the distribution in the
calculation.
b. Assuming an underwriting spread of 5 percent and out-of-pocket costs of $300,000,
what will net proceeds to the corporation be?
c. What return must the corporation earn on the net proceeds to equal the earnings per
share before the offering? How does this compare with current return on the total assets
on the balance sheet?
Chapter 15: Investment Banking: Public and Private Placement
d. Now assume that, of the initial 800,000-share distribution, 400,000 belong to current
stockholders and 400,000 are new shares, and the latter will be added to the 1,800,000
shares currently outstanding. What will earnings per share be immediately after the
public offering? What will the initial market price of the stock be? Assume a price-
earnings ratio of 12 and use earnings per share after the distribution in the calculation.
e. Assuming an underwriting spread of 5 percent and out–of-pocket costs of $300,000,
what will net proceeds to the corporation be?
f. What return must the corporation now earn on the net proceeds to equal earnings per
share before the offering? How does this compare with current return on the total assets
on the balance sheet?
CP 15-1. Solution:
New Public Offering
Bailey Corporation
Earnings
a. Earnings per share (after) Shares
$3,162,000 $3,162,000
$1.22
1,800,000 800,000 2,600,000
Initial market price P/E EPS
12 $1.22 $14.64
=
==
+
=
= =
b. 800,000 shares $14.64 $11,712,000 gross proceeds
585,600 5% spread
300,000 out-of-pocket costs
$10,826,400 net proceeds
=
−
−
Earnings
c. Earnings per share (before) Shares
$3,162,000 $1.76
1,800,000
=
==
Chapter 15: Investment Banking: Public and Private Placement
15-30
CP 15-1. (Continued)
$3,162,00 X $1.76
1,800,000 800,000
$3,162,000 X $1.76(2,600,00)
+=
+
+=
$3,162,000 X $1.76
2,600,000
+=
X $4,576,000 $3,162,000
X $1,414,000
=−
=
Proof:
$3,162,000 $1,414,000 $4,576,000
$1.76
1,800,000 800,000 2,600,000
New earnings $1,414,000
thus: 13.06%
New proceeds $10,826,400
+==
+
==
Chapter 15: Investment Banking: Public and Private Placement
15-31
Net income $3,162,000 11.04%
Total assets $28,650,000
==
CP 15-1. (Continued)
Earnings
d. Earnings per share (after) Shares
$3,162,000 $3,162,000
$1.44
1,800,000 400,000 2,200,000
=
==
+
Initial market price = P/E EPS
12 $1.44 = $17.28
e. 400,000 $17.28 = $6,912,000 gross proceeds
f.
$3,162,000 X $1.76
1,800,000 400,000
$3,162,000 X $1.76
2,200,000
+=
+
+=
$3,162,000 + X = $1.76 (2,200,000)
X = $3,872,000 – $3,162,000
X = $710,000
proof:
Chapter 15: Investment Banking: Public and Private Placement
15-32
$3,162,000 $710,000 $3,872,000 $1.76
1,800,000 400,000 2,200,000
+==
+
CP 15-1. (Continued)
thus:
New earnings $710,000 11.33%
Net proceeds $6,266,400
==
Net income $3,162,000 11.04%
Total assets $28,650,000
==