Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of $9 million in the current year. The company is considering the issuance of 1 million additional shares that will net $40 per share to the corporation.
a. What is the immediate dilution potential for this new stock issue?
b. Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include it in the current year’s results. Should the new issue be undertaken based on earnings per share?
a. The dilution is $0.30.
b. Yes, the new issue should be undertaken.
Conclusion: Hence, the new issue should be undertaken because earnings per share will grow by $0.43.
Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 10 percent of the issue. Its price is $27 per share, and the price to the public is $28.95.
Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of $27.50. It later sells the shares at an average value of $27.20.
Compute Becker Brother’s overall gain or loss from managing the issue.
The Presley Corporation is about to go public. It currently has after-tax earnings of $7,200,000, and 2,100,000 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 $25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.
a. Compute the net proceeds to the Presley Corporation.
The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of $6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at $30 per share.
a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.
b. Should the new issue be undertaken based on earnings per share?
The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:
|In $ millions||In $ millions|
Total stockholder’s equity and liabilities
The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.
c. Compute total debt to total assets on the original and revised balance sheets.
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