Corporations earnings per share before the offering

Question 1: Jordan Broadcasting Company is going public at $40 net per share to the company.  There also are founding stockholders that are selling part of their shares at the same price.  Prior to the offering, the firm had $24 million in earnings divided over eight million shares.  The public offering will be for five million shares; three million will be new corporate shares and two million will be shares currently owned by the founding stockholders.

a. What is the immediate dilution based on the new corporate shares that are being offered?

b. If the stock has a P/E or 23 immediately after the offering, what will the stock price be?

c. Should founding stockholders be pleased with the $40 they received for their shares?

Question 2: Kevin Bacon’s Company Inc. has earning of $6 million with 2,000,000 shares outstanding before a public distribution.  Five hundred thousand shares will be included in the sale, of which 300,000 are new corporate shares, and 200,000 are shares currently owned by Ann Fry, the founder and CEO.  The 200,000 shares that Ann is selling are referred to as a secondary offering and all proceeds will go to her.

a. What were the corporation’s earnings per share before the offering?

b. What are the corporation’s earnings per share expected to be after the offering?

Question 3: Rodgers Homebuilding is about to go public.  The investment banking firm of Leland Webber and Company is attempting to price the issue.  The homebuilding industry generally trades at a 20 percent discount below the P/E ratio on the Standard & Poor’s 500 Stock Index.  Assume that index currently has a P/E of 25.  Rodger can be compared to the homebuilding industry as follows:

                                                         Rogers               Homebuilding                                
Growth rate in earnings per share           12%                      10%
Consistency of performance        Increased earnings    Increased earnings   
                                                     4 out of 5yrs           3 out of 5yrs
Debt to total assets                                55%                       40%
Turnover of product                        Slightly below              Average
Quality of management                           High                    Average

Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor’s 500 Index.  Then ½ point will be added to the P/E ratio for each case in which Rodgers is superior to the industry norm, and ½ point will be deducted for an inferior comparison.  On this basis, what should the initial P/E be for Rodgers Homebuilding?

Question 4: An investor must choose between two bonds:

Bond A pays $92 annual interest and has a market value of $875.  It has 10 years to maturity.  Bond B pays $82 annual interest and has a market value of $900.  It has two years to maturity.

a. Compute the current yield on both bonds.

b. Which bond should she select based on your answer to part a?

c. A drawback of current yield is that it does not consider the total life of the bond.  For example, the approximate yield to maturity on Bond A is 11.30 percent.  What is the approximate yield to maturity on Bond B?

Question 5: A $1,000 par value bond was issue 25 years ago at a 7 percent coupon rate.  It currently has 10 years remaining to maturity.  Interest rates on similar debt obligations are now 12 percent.

a. Compute the current price of the bond using an assumption of semiannual payments?

b. If Mr. Robinson initially bought the bond at par value, what is his percentage loss (or gain)?

c. Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity, what will her percentage return be?

d. Although the same dollar amounts are involved in part b and c, explain why the percentage gain is larger than the percentage loss.

Question 6: The Hardaway Corporation plans to lease a $900,000 asset to the O’Neil Corporation.  The lease will be for 10 years.

a. If the Hardaway Corporation desires a 12 percent return on its investment, how much should the lease payments be?

b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $900,000 and will pass the benefits along to the O’Neil Corporation in the form of lower payments, how much should the revised lease payments be?  Continue to assume the Hardaway Corporation desires.

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Finance Basics: Corporations earnings per share before the offering
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