Macho Tool 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 $48 million in earnings divided over 12 million shares. The public offering will be for six million shares; four million will be new corporate shares and two 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 20 immediately after the offering, what will the stock price be?
c. Should the founding stockholders be pleased with the $50 they received for their shares?
a. To calculate the immediate dilution based on the new corporate shares that are being offered, we need to compare the earnings per share (EPS) before and after the offering.
Before the offering:
Earnings = $48 million
Number of shares = 12 million
EPS = Earnings / Number of shares = $48 million / 12 million = $4 per share
After the offering:
Earnings = $48 million
Number of shares = 12 million (existing shares) + 4 million (new corporate shares) = 16 million shares
EPS = Earnings / Number of shares = $48 million / 16 million = $3 per share
Dilution per share = EPS before offering - EPS after offering = $4 - $3 = $1 per share
Therefore, the immediate dilution based on the new corporate shares being offered is $1 per share.
b. To calculate the stock price after the offering, we need to use the price-to-earnings (P/E) ratio.
P/E ratio = Stock price / Earnings per share
Given the P/E ratio of 20, we can set up the equation:
20 = Stock price / $3
Stock price = 20 * $3 = $60 per share
Therefore, if the stock has a P/E of 20 immediately after the offering, the stock price will be $60 per share.
c. To determine if the founding stockholders should be pleased with the $50 they received for their shares, we need to compare the price they received to the stock price after the offering.
Given that the stock price after the offering is $60 per share, the founding stockholders sold their shares at $50 per share. Therefore, they sold their shares at a lower price than what the stock is currently valued at.
So, the founding stockholders might not be completely pleased with the $50 they received for their shares, as they could have potentially sold them for a higher price if they had waited until after the offering.
a. To calculate the immediate dilution based on the new corporate shares, we need to compare the earnings per share (EPS) before and after the offering.
Before the offering:
Earnings = $48 million
Shares = 12 million
EPS = Earnings / Shares = $48 million / 12 million = $4 per share
After the offering:
Earnings = $48 million
Shares = 12 million + 4 million (new corporate shares) = 16 million
EPS = Earnings / Shares = $48 million / 16 million = $3 per share
Dilution per share = EPS before offering - EPS after offering = $4 per share - $3 per share = $1 per share
So, the immediate dilution based on the new corporate shares is $1 per share.
b. To calculate the stock price after the offering, we need to multiply the EPS by the P/E ratio.
EPS after offering = $3 per share
P/E ratio = 20
Stock price = EPS after offering * P/E ratio = $3 per share * 20 = $60 per share
Therefore, the stock price will be $60 per share if the stock has a P/E ratio of 20 immediately after the offering.
c. To determine whether the founding stockholders should be pleased with the $50 they received for their shares, we need to compare the sale price per share ($50) to the estimated stock price after the offering.
Stock price after offering = $60 per share
Since the stock price after the offering is higher than the sale price per share, the founding stockholders should be pleased with the $50 they received for their shares. They have sold their shares at a price higher than the estimated stock price after the offering.