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.

c. Compute the earnings per share immediately after the stock issue.

Short answer

The earnings per share after stock issue is $2.48.

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 earnings per share after stock issue

The earnings per share is $2.48.

$\begin{array}{rcl}\mathrm{EPS}& =& \frac{\mathrm{Net}\mathrm{earnings}}{\mathrm{SHares}\mathrm{outstanding}}\\ & =& \frac{\$7,200,000}{2,900,000}\\ & =& \$2.48\end{array}$