Question

Jordan Broadcasting Company is going public at $40 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 $27 million in earnings divided over 9 million shares. The public offering will be for 7 million shares; 2 million will be new corporate shares and 5 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.)
  

b. If the stock has a P/E of 25 immediately after the offering, what will the stock price be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

c. Should the founding stockholders be pleased with the $40 they received for their shares?
  

	Yes
	No

Answer 1

a). EPS before stock issue = Earnings / No. of o/s shares = $27,000,000 / 9,000,000 = $3.00

EPS after stock issue = $27,000,000 / 11,000,000 = $2.45

Note only two million new corporate shares were issued. The other five million belonged to founding stockholders and do not increase the number of shares outstanding.

b). Stock Price = EPS x P/E = $2.45 x 25 = $61.36

c). The founding stockholders will probably not be pleased. They received a net price of $40 and the stock has a value of $61.36 immediately after the offering. They may wish the initial offering price had been higher.