Chapter 5: 19BP_b (page 498)

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.
b. Compute the earnings per share immediately before the stock issue.

Expert verified

The earnings per share is $3.43.

Step by step solution

After-tax earnings = $7,200,000

Shares outstanding = 2,100,000

Shares issued in new public issue = 800,000 shares

Selling price for new public issue = $25 per share

Spread = 5%

Out-of-pocket costs = $260,000

The earnings per share is $3.43.

$\begin{array}{rcl} EPS & = & \frac{Net earnings}{Shares outstanding} \\ = & \frac{$ 7, 200, 000}{2, 100, 000} \\ = & $ 3.43 \end{array}$

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In \( millions	In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder’s equity	\)80
Total assets	\(140	Total stockholder’s equity and liabilities	\)140