Solution
Chapter 15: Raising Capital
Page 505-506 Questions: 9, 10, 13, 14
9.
a.
The number of shares outstanding after the stock offer will be the current shares
outstanding, plus the amount raised divided by the current stock price, assuming
the stock price doesn’t change. So:
Number of shares after offering = 8,000,000 + $35,000,000/$50 = 8,700,000
Since the book value per share is $18, the old book value of the shares is the
current number of shares outstanding times 18. From the previous solution, we
can see the company will sell 700,000 shares, and these will have a book value
of $50 per share. The sum of these two values will give us the total book value
of the company. If we divide this by the new number of shares outstanding.
Doing so, we find the new book value per share will be:
New book value per share = [8,000,000($18) + 700,000($50)]/8,700,000 =
$20.57
The current EPS for the company is:
EPS
0
= NI
0
/Shares
0
= $17,000,000/8,000,000 shares = $2.13 per share
And the current P/E is:
(P/E)
0
= $50/$2.13 = 23.53
If the net income increases by $1,100,000, the new EPS will be:
EPS
1
= NI
1
/shares
1
= $18,100,000/8,700,000 shares = $2.08 per share
Assuming the P/E remains constant, the new share price will be:
P
1
= (P/E)
0
(EPS
1
) = 23.53($2.08) = $48.95