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Chapter 5: 20BP_a (page 499)

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.

a. Compute the net proceeds to Tyson Iron Works.

Short Answer

Expert verified

The net proceeds of the company is $11,845,000.

Step by step solution

01

Information provided in the question

After-tax earnings = $4,400,000

Shares outstanding = 4,200,000

Shares issued in new public issue = 500,000 shares

Selling price for new public issue = $25 per share

Spread = 3%

Out-of-pocket costs = $280,000

02

Calculation of net proceeds of the company

The net proceeds for the company is $11,845,000.

Selligpriceafterspread=Sellingprice-Sellingprice×Spread=$25-$25×3%=$24.25Netproceeds=Sellingpriceafterspread×Numberofissuesspread-Outofpocketcosts=$24.25×500,000shares-$280,000=$11,845,000

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