Micromanagement, Inc has 8 million shares of stock outstanding and will eport earnings of $20 million in the current year. The company is considering the issuance of 2 million additional shares that will net $30 per share to the corDor a. What is the immediate dilution potential for this new stock issue? b. Assume that Micromanagement can earn 12.5 percent on the proceeds of the stock issue in time to include it in the current year,s results. Should the new issue be undertaken based on earnings per share? Solution: Micromanagement Inc. a. Earnings per share before stock issue $20,000,000/8,000,000=$2.50 Earnings per share after stock issue $20,00000/1000000=$2.00 dilution $2.50 2.00 S. 50 per share b. Net income=$20,000000.125(2,000,000X$30) =$20,000000.125(s60,000,000 $20000.000+$7,500,000 $27,500,000 Earnings per share after additional income EPS=$27,500,000/10,000,000 $2.75 Yes, the eps of $2. 75 is higher than $2. 50 S-529 Copyright C2005 by The McGra-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-529 15-3. Micromanagement, Inc. has 8 million shares of stock outstanding and will report earnings of $20 million in the current year. The company is considering the issuance of 2 million additional shares that will net $30 per share to the corporation. a. What is the immediate dilution potential for this new stock issue? b. Assume that Micromanagement can earn 12.5 percent on the proceeds of the stock issue in time to include it in the current year's results. Should the new issue be undertaken based on earnings per share? Solution: Micromanagement, Inc. a. Earnings per share before stock issue $20,000,000/8,000,000 = $2.50 Earnings per share after stock issue $20,000,000/10,000,000 = $2.00 dilution $2.50 2.00 $ .50 per share b. Net income = $20,000,000 + .125 (2,000,000 x $30) = $20,000,000 + .125 ($60,000,000) = $20,000,000 + $7,500,000 = $27,500,000 Earnings per share after additional income EPS = $27,500,000/10,000,000 = $2.75 Yes, the EPS of $2.75 is higher than $2.50
In problem 3, if the 2 million add itional shares can be issued at $27 per share and the company can earn 10.8 percent on the proceeds, should the new issue be undertaken based on earnings per share? Solution Micromanagement, Inc( Continued) Net income=$20,000,000+.108(2000,000X$27) $2000000+.108($54,000,000 =$20,0000+$5,832,000 $25,832,000 Earnings per share after additional income EPS=$25,832,000/10,00000 $258 Yes, the eps of $2.58 is still higher than $2.50 CopyrightC 2005 by The McGray-Hill Companies, Inc. -530
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-530 15-4. In problem 3, if the 2 million additional shares can be issued at $27 per share and the company can earn 10.8 percent on the proceeds, should the new issue be undertaken based on earnings per share? Solution: Micromanagement, Inc. (Continued) Net income = $20,000,000 + .108 (2,000,000 x $27) = $20,000,000 + .108 ($54,000,000) = $20,000,000 + $5,832,000 = $25,832,000 Earnings per share after additional income EPS = $25,832,000/10,000,000 = $2.58 Yes, the EPS of $2.58 is still higher than $2.50
Assume Safeguard Detective Company is thinking about three different size offerings for the issuance of ad ditional shares Size of offer Public price Net to Corporation a. S1.5 million $50 $46.10 b. $5.5 million $50 $4680 C. $20.0 million $4815 What is the percentage underwriting spread for each size offer? What principle does this demonstrate? Solution: Safeguard Detective Company a. Spread=$50-$46.10=$390(on$15 million) %underwriting spread =$3.90/$50=7.80% b Spread=$50-$46.80=$3.20(on $5.5 million) underwriting spread=$3.20/$50=6.40% c. Spread=$50-$4815=$1.85(on $20 million) underwriting spread=$1.85/$50=3.70% The principle demonstrated is the larger the offer size the lower the percentage spread CopyrightC2005 by The McGraw-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-531 15-5. Assume Safeguard Detective Company is thinking about three different size offerings for the issuance of additionalshares. Size of Offer Public Price Net to Corporation a. $1.5 million $50 $46.10 b. $5.5 million $50 $46.80 c. $20.0 million $50 $48.15 What is the percentage underwriting spread for each size offer? What principle does this demonstrate? Solution: Safeguard Detective Company a. Spread = $50 – $46.10 = $3.90 (on $1.5 million) % underwriting spread = $3.90/$50 = 7.80% b. Spread = $50 – $46.80 = $3.20 (on $5.5 million) % underwriting spread = $3.20/$50 = 6.40% c. Spread = $50 – $48.15 = $1.85 (on $20 million) % underwriting spread = $1.85/$50 = 3.70% The principle demonstrated is the larger the offer size, the lower the percentage spread
Blaine and Company is the managing investment banker for a major new Other synd icate members may buy the stock for $24.30. The price to the hare underwriting. The price of the stock to the investment banker is $24 per selected dealers group is $24.90, with a price to brokers of $25. 32. The price to the public is $25.60 a. If Blaine and Company sells its shares to the dealer group, what will be the percentage return? b. If Blaine and Company performs the dealer's function also and sells to brokers, what will be the percentage return? c. If Blaine and Company fully integrates its operation and sells directly to the oublic, what will be the percentage return? Solution: Blaine and company a.$24.90 Selected dealer group's price 24.00 Managing investing banker's price s 90 Differentia 90=3.75% Return $2400 b $25.32 Broker's price 24.00 Managing investment banker's price S 1.32 Differential $132 5.5% Return $24.00 c $25.60 Public price 24.00 Managing investment banker's price S 1.60 Differentia $160=667% Return $2400 CopyrightC 2005 by The McGray-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-532 15-6. Blaine and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is $24 per share. Other syndicate members may buy the stock for $24.30. The price to the selected dealers group is $24.90, with a price to brokers of $25.32. The price to the public is $25.60. a. If Blaine and Company sells its shares to the dealer group, what will be the percentage return? b. If Blaine and Company performs the dealer's function also and sells to brokers, what will be the percentage return? c. If Blaine and Company fully integrates its operation and sells directly to the public, what will be the percentage return? Solution: Blaine and Company a. $24.90 Selected dealer group's price 24.00 Managing investing banker's price $ .90 Differential $ .90 = 3.75% Return $24.00 b. $25.32 Broker’s price 24.00 Managing investment banker's price $ 1.32 Differential $ 1.32 = 5.5% Return $24.00 c. $25.60 Public price 24.00 Managing investment banker's price $ 1.60 Differential $ 1.60 = 6.67% Return $24.00
The Detroit Slugger Bat Company needs to raise $30 million. The investment banking firm of Kaline, Horton, greenberg will handle the transaction a. If stock is utilized, 1. 8 million shares will be sold to the public at $16.75 per share. The corporation will receive a net price of $16 per share. What is the percentage of underwriting spread per share? b. If bonds are utilized, slightly over 30,000 bonds will be sold to the public at $1,001 per bond. The corporation will receive a net price of$993 per bond What is the percentage of underwriting spread per bond? (Relate the dollar pread to the public price c. Which alternative has the larger percentage of spread? Is this the normal lationship between the two types of issues? Solution: Detroit Slugger Bat Company a. Spread=$16.75-$16.00=$0.75 Underwriting spread=$0.75/$16.75=4.48% b. Spread=$1001-$993=$8 Underwriting spread=$8/$1,001=799%or 80%(rounded) C. The stock alternative has the larger percentage spread This is normal because there is more uncertainty in the market associated with a stock offering and investment bankers want to be appropriately compensated -533 Copyright C2005 by The McGra-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-533 15-7. The Detroit Slugger Bat Company needs to raise $30 million. The investment banking firm of Kaline, Horton, & Greenberg will handle the transaction. a. If stock is utilized, 1.8 million shares will be sold to the public at $16.75 per share. The corporation will receive a net price of $16 per share. What is the percentage of underwriting spread per share? b. If bonds are utilized, slightly over 30,000 bonds will be sold to the public at $1,001 per bond. The corporation will receive a net price of $993 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price.) c. Which alternative has the larger percentage of spread? Is this the normal relationship between the two types of issues? Solution: Detroit Slugger Bat Company a. Spread = $16.75 – $16.00 = $0.75 % Underwriting spread = $0.75/$16.75 = 4.48% b. Spread = $1,001 – $993 = $8 % Underwriting spread = $8/$1,001 = .799% or .80% (rounded) c. The stock alternative has the larger percentage spread. This is normal because there is more uncertainty in the market associated with a stock offering and investment bankers want to be appropriately compensated