Question

Jordan Broadcasting Company is going public at $45 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering, the firm had $26 million in earnings divided over 10 million shares. The public offering will be for 6 million shares; 5 million will be new corporate shares and 1 million will be shares currently owned by the founding stockholders.

a. What is the immediate dilution based on the new corporate shares that are being offered? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Dilution ______ per share

b. If the stock has a P/E of 30 immediately after the offering, what will the stock price be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Stock price __________

Answer 1

Answer A: EPS before the stock issue for the Company is

EPS = Total Earnings / Total No of shares = $26 million / $10 million = $2.6 per share

EPS after the issue of new shares ($10 million + $5 million)

1 million shares of the founding members wont impact as they were already there, Won't increase number of shares outstanding

EPS = $26 million / $15million = $1.733 per share

New Diluted share per earning is $1.733 per share

Answer B: EPS * P/E will give us the stock price after the Dilution

EPS after dilution is $1.733 per share

P/E after Dilution is 30

Stock price = 1.733 * 30 = $52 per Share.