Question

Jordan Broadcasting Company is going public at \(50 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering, the firm had \)26 million in earnings divided over 11 million shares. The public offering will be for 5 million shares; 3 million will be new corporate shares and 2 million will be shares currently owned by the founding stockholders.

a. What is the immediate dilution based on the new corporate shares that are being offered?

b. If the stock has a P/E of 30 immediately after the offering, what will the stock price be?

c.hould the founding stockholders be pleased with the $50 they received for their shares?

Short answer

a. Immediate dilution is $0.5.

b. The stock price will be $55.80.

c. No, the founding stockholders should not be pleased.

Step-by-step solution

Computation of immediate dilution

$$\begin{gathered} Earningspersharebeforestockissue=\frac{Earnings}{Outs\tan dingshareses} \\ =\frac{\$26,000,000}{11,000,000} \\ =\$2.36 \\ Earningspersharebeforestockissue=\frac{Earnings}{Outs\tan dingshares+AdditionalShares} \\ =\frac{\$26,000,000}{11,000,000+3,000,000} \\ =\$1.86 \\ Dilution=EPSbeforestockissue-EPSafterstockissue \\ =\$2.36-\$1.86 \\ =\$0.5 \end{gathered}$$

Computation of stock price

$$\begin{gathered} Stockprice=EPSafterstockissue\times \frac{P}{E} \\ =\$1,86\times 30 \\ =\$55.80 \end{gathered}$$

Computation of decline in EPS

Decline in EPS=EPS before stock issue-EPS after stock issue

=$2.36-$1.86

=$0.50

Conclusion: Hence, the founding stockholders should not be pleased with $50 because the earnings per share will decline by $0.50.