Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 5: 18BP_e (page 498)

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

e. Are the shareholders better off because of the sale of stock and the resultant investment? What other financing strategy could the company have tried to increase earnings per share?

Short Answer

Expert verified

The EPS has increased due to the investment made in the new facility and this has benefitted by the shareholders. The EPS can be increased by increasing the company’s earnings and also by buying-back the shares and reducing the outstanding shares.

Step by step solution

01

Impact of sale of stock and investment on shareholders

The investment made by the company due to the sale of shares has resulted in an increase in the earnings per share of the company. The increased EPS will benefit the shareholders as it will result in an increase in their earnings.

02

Financing strategy that the company could have used

The company can use the following financing strategy for increasing its EPS:

  1. Increasing the company’s net earnings: The increase in net earnings will also help in improving the company’s earnings per share.
  2. The buy-back of shares will help in reducing the number of outstanding shares which will result in an increase in company’s earnings per share.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

a. Calculate the present value of total outflows.

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

c. Calculate the net present value.

What is the difference between the following yields: coupon rate, current yield, and yield to maturity? (LO16-2)


What act of Congress created the Securities and Exchange Commission?

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

c. Compute the earnings per share immediately after the stock issue.
See all solutions

Recommended explanations on Business Studies Textbooks

Influences On Business

Read Explanation

Financial Performance

Read Explanation

Human Resources

Read Explanation

Managerial Economics

Read Explanation

Nature of Business

Read Explanation

Intermediate Accounting

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free