Robert Boyle & Associates, Inc.
Case 22
Going Public and Investment Banking
Purpose: The pros and cons of going public are considered in this case. Although the firm is a fictitious
company, it is compared to a number of actual companies in the Real Estate Investment Trust (REIT)
industry in order to establish the initial evaluation. The problem of capital shortage for the small private
firm is the catalyst for considering the new offering. The potential dilution of new stock issues on
earnings per share is carefully considered. In order to bring added interest to the case, there is a slightly
nagging spouse who serves as a devil’s advocate.
Relation to Text: This case should follow Chapter 15.
Complexity: The case is moderately complex and should require 1 hour.
Solutions
1. Computation of Robert Boyle & Associates P / E ratio:
Industry P/E ………………………………………………………………………..
14.0
Return on equity:
Boyle
Industry
35.5%
12.8%
+.5
Return on assets:
Boyle
Industry
19.5%
8.7%
+.5
Debt to assets:
Boyle
Industry
.45
.31
–.5
Asset turnover:
Boyle
Industry
.30
.22
+.5
Net profit margin:
Boyle
Industry
64.1%
37.5%
+.5
5-yr EPS growth:
Boyle
Industry
9.7%
5.3%
+.5
Net additions and subtractions:
+2.0
Minus 1 to ensure a good sale:
–1.0
Final P/E Ratio for Robert Boyle & Associates:
15.0
vs. 14.0 Industry P/E
2. Total size of the stock issue necessary to yield $10 million in net proceeds:
The size of the issue – the size times the spread percentage – out-of-pocket expenses = net proceeds
=
.065(X) – $60,000
=
$10,000,000
=
$10,060,000
=
$10,759,358.29,
($4,100,000 + X) / 4,699,029*
=
$1.03
=
$1.03 x 4,699.029
=
$4,840,000
=
$740,000
*4,00,000 old shares + 699,029 new shares = 4,699,029
Next compute the percent dollar return on the net proceeds.
$740,000 / $10,000,000 = 7.4%
4. The total number of shares to be issued will be the two million from the existing stockholders plus the
5. Summary of the advantages of going public:
— Provides access to capital, which, in this case, appears difficult to obtain in any other way.
Summary of the disadvantages:
— Relatively high cost (over $759,358 in this case to raise $10 million).
— Additional paperwork and reporting requirements.
Conclusion: Robert Boyle & Associates is doing perfectly well as it is, and could conceivably
continue doing so without getting involved in the new shopping center on Nantucket Island.