Chapter 5: 20BP_b (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.
b. Compute the earnings per share immediately before the stock issue.

Expert verified

The earnings per share before stock issue is $1.047.

Step by step solution

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

The earnings per share is $1.047.

$\begin{array}{rcl} EPS & = & \frac{Net earnings}{Shares outstanding} \\ = & \frac{$ 4, 400, 000}{4, 200, 000} \\ = & $ 1.047 \end{array}$

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Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	\(8,500,000

	Richmond	Car Rental Industry
Growth rate in earnings per share.....	15%	10%
Consistency of performance.............	Increased earnings 4 out of 5 years	Increased earnings 3 out of 5 years
Debt to total assets.....................	52%	39%
Turnover of product.........................	Slightly below average	Average
Quality of management..................	High	Average