The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm's investment banker, Robert Frost and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:
BAILEY CORPORATION
Income Statement
For the Year 201X
Sales (all on credit)........................................... $42,680,000
Cost of goods sold............................................ 32,240,000
Gross profit....................................................... 10,440,000
Selling and administrative expenses................. 4,558,000
Operating profit................................................ 5,882,000
Interest expense................................................ 600,000
Net income before taxes................................... 5,282,000
Taxes................................................................. 2,120,000
Net income........................................................ $ 3,162,000
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?
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?