Question: 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 Merrill 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 20X1
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, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)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	\(12,970,000
Stockholder’s equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder’s equity	\)15,680,000
Total liabilities and stockholder’s equity	\(28,650,000

b. Assuming an underwriting spread of 5 percent and out-of-pocket costs of \)300,000, what will net proceeds to the corporation be?

Step by step solution

01

Information available

Shares issued = 800,000 shares

Shares outstanding = 1,800,000

Out-of-pocket costs = $300,000

PE ratio = 12 times

EPS =$1.22

Initial price =$14.64 per share

02

Calculation of net proceeds to the corporation

The net proceeds to the corporation is $10,826,400.

$$\begin{gathered} Netproceeds=(Sharesissued\times Initialmarketprice)-Spread-Outofpocket\cos ts \\ =(\$800,000\times \$14.64)-(\$800,000\times \$14.64\times 5\%)-\$300,000 \\ =\$11,712,000-\$585,600-\$300,000 \\ =\$10,826,400 \end{gathered}$$

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