Chapter 5: Q6DQ (page 622)
What is meant by a step-up in the conversion price?
Answer
In convertible securities, step-ups causes a scheduled increments in the conversion price of the security.
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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.
Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?
Under what circumstances would a call on a bond be exercised by a corporation? What is the purpose of a deferred call? (LO16-3)
Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.
d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.
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?
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