Question

The Presley Corporation is about to go public. It currently has after-tax earnings of \(7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at \)25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to the Presley Corporation.

Short answer

The net proceeds of the company is $18,740,000.

Step-by-step solution

Information provided in the question

After-tax earnings = $7,200,000

Shares outstanding = 2,100,000

Shares issued in new public issue = 800,000 shares

Selling price for new public issue = $25 per share

Spread = 5%

Out-of-pocket costs = $260,000

Calculation of net proceeds of the company

The net proceeds for the company is $18,740,000.

$\begin{array}{rcl}\mathrm{Selling}\mathrm{price}\mathrm{after}\mathrm{spread}& =& \mathrm{Selling}\mathrm{price}-\left(\mathrm{Selling}\mathrm{price}\times \mathrm{Spread}\right)\\ & =& \$25-\left(\$25\times 5\%\right)\\ & =& \$23.75\end{array}$

$\begin{array}{rcl}\mathrm{Net}\mathrm{proceeds}& =& \left(\mathrm{Selling}\mathrm{price}\mathrm{after}\mathrm{spread}\times \mathrm{Number}\mathrm{of}\mathrm{shares}\right)-\mathrm{Out}\mathrm{of}\mathrm{pocket}\mathrm{cost}\\ & =& \$23.75\times 800,000-\$260,000\\ & =& \$18,740,000\end{array}$