Question

Kevin’s Bacon Company Inc. has earnings of \(9 million with 2,100,000 shares outstanding before a public distribution. Seven hundred thousand shares will be included in the sale, of which 400,000 are new corporate shares, and 300,000 are shares currently owned by Ann Fry, the founder and CEO. The 300,000 shares that Ann is selling are referred to as a secondary offering, and all proceeds will go to her.

The net price from the offering will be \)16.50, and the corporate proceeds are expected to produce $1.8 million in corporate earnings.

a. What were the corporation’s earnings per share before the offering?

b. What are the corporation’s earnings per share expected to be after the offering?

Short answer

1. Earnings per share before offering are $4.28.
2. Earnings per share after the offering are $4.32.

Step-by-step solution

Computation of earnings per share before offering

$$\begin{gathered} Earningspershare=\frac{Earnings}{Outs\tan dingshares} \\ =\frac{\$9,000,000}{2,100,000} \\ =\$4.28 \end{gathered}$$

Computation of earnings per share after offering

$$\begin{gathered} TotalEarnings=ReportedEarnings+ExpectedEarnings \\ =\$9,000,000+\$1,800,000 \\ =\$10,800,000 \end{gathered}$$

$$\begin{gathered} Totalnumberofshares=Outs\tan dingshares+Additionalshares \\ =\$2,100,000+\$400,000 \\ =\$2,500,000 \end{gathered}$$

$$\begin{gathered} Earningspershareafteroffering=\frac{Totalearnings}{Totalnumberofshares} \\ =\frac{\$10,800,000}{2,500,000} \\ =\$4.32 \end{gathered}$$