Question

Jordan Broadcasting Company is going public at $43 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 $28 million in earnings divided over 6 million shares. The public offering will be for 5 million shares; 3 million will be new corporate shares and 2 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 15 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 $43 they received for their shares?
  

	Yes
	No

Answer 1

a) New share to be issued by the company = 3 million shares and 2 million shares will be sold by existing investor. hence Total number of shares after IPO = 6 million shares + 3 million shares = 9 million shares

EPS = Net profit/Number of shares

EPS prior to IPO = 28 million/6 million = 4.67$

EPS after IPO = 28 million/9 million = 3.11$

Immediate dilution in EPS = 4.67-3.11 = 1.56$

b) IF PE is 15 after offering, the market price will be

Market price of share = EPS*PE ratio

=3.11*15

=46.67$

c) NO

Since after offering price of share will be higher than what is received by founding member