Question

Northern Airlines is about to go public. It currently has aftertax earnings of $5,300,000 and 3,700,000 shares are owned by the present shareholders. The new public issue will represent 700,000 new shares. The new shares will be priced to the public at $20 per share, with a 5 percent spread on the offering price. There will also be $190,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to the Northern Airlines. Net proceeds $

b. Compute the EPS immediately before the stock issue. (Round the final answer to 2 decimal places.) EPS $

c. Compute the EPS immediately after the stock issue. (Round the final answer to 2 decimal places.) EPS $

d. Determine what rate of return must be earned on the net proceeds to the corporation so that there will not be a dilution in EPS during the year of going public. (Round the intermediate calculations and the final answer to 2 decimal places.) Rate of return %

e. Determine what rate of return must be earned on the proceeds to the corporation so that there will be a 15 percent increase in EPS during the year of going public. (Round the intermediate calculations and the final answer to 2 decimal places.) Rate of return %

Answer 1

i Nos. 2 (a) Nos. 7,00,000 (d) Amount in $ 53,00,000 No. of new shares Offering price of per share 62,92,000 Uw After tax earning before share issue After tax earning with out dilution of EPS after share issue (1.43*4400000) Amount of earning required (6292000-5300000) Net proceed to the Northen Airline 9,92,000 $ 20 Amount in $ 1,40,00,000 7,00,000 1,90,000 1,31,10,000 Total value of share 5% spread on offering price Out of pocket cost to the corporation Net proceed to the Northen Airline 1,31,10,000 7.57% Rate of return required for not dilution in the EPS (992000/13110000)*100 10 11 (b) 12 After tax earning before share issue No. of shares Amount in $ 53,00,000 37,00,000 Amount in $ EPS immidiately before the stock issue 1.43 (e) 53,00,000 62,92,000 16 (c) After tax earning before share issue No. of shares No. of new shares Total share after issue (3700000+700000) EPS immidiately after the share issue 9,92,000 After tax earning before share issue After tax earning with out dilution of EPS after share issue (1.43*4400000) Amount of earning required (6292000-5300000) 15% increase in the EPS (15%*9,92,000) Total earning (992000+148800) Net proceed to the Northen Airline Amount in $ 53,00,000 37,00,000 7,00,000 44,00,000 1,48,800 11,40,800 1,31,10,000 1.20 8.70% Rate of return required for not dilution in the EPS (1140800/13110000)*100