Tyson Iron Works is about to go public. It currently has aftertax earnings of $4
ID: 2712637 • Letter: T
Question
Tyson Iron Works is about to go public. It currently has aftertax earnings of $4,300,000, and 4,700,000 shares are owned by the present stockholders. The new public issue will represent 600,000 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 $320,000 in out-of-pocket costs to the corporation.
d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Determine what rate of return must be earned on the proceeds to the corporation so there will be a 5 percent increase in earnings per share during the year of going public. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Explanation / Answer
Current EPS = Earning available / Total no of shares = 4300000 / 4700000 = 0.92 per share
New No of shares = 4700000+600000 = 5300000 shares
So, Total earnings = 5300000 * .92 = 4876000
Incremental earning = 4876000 - 4300000 =576000
Total earnings from new issue = 600000 shares * (25+ 3% of spread)
= 600000 * 25.75 = 1545000
Balance after pocket cost = 15450000 - 320000 = 1513000
The rate of return on new proceeds should be incremental revenue / Total net proceeds
= 576000 / 1513000 = 38.07%
If EPS is 5% up
Then required EPS = .91*1.05 = 0.97 per share
Net Income = 0.97 *5300000 = 5141000
Increase in income required = 5141000 -4700000 = 841000
required return = 841000 / 1513000*100 = 55.58%
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