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R and R company currently has net income of $3 million and 1
R and R company currently has net income of $3 million and 1. million common shares outstanding which sell for $20 per share. R and R has decided to issue new stock to raise $4,000,000 to expand its operations. Rand R investment banker will sell the new shares for $18 per share with a spread of 7%. There will be a $60,000 registration cost.
a. Calculate the current EPS and PE ratio
b. How many shares will have to be sold to net the $4,000,000 that R and R needs?
Explain?
Expert Solution
Net income = 3,000,000
Number of shares outstanding = 1,000,000
Earnings per shares (EPS) = Net Income/Number of shares outstanding
EPS = 3,000,000/1,000,000 = $3
market Price = $20
P/E ratio = Market Price/EPS = 20/3 = 6.67
b. The spread is 7%. The price received by the firm will be 18*.93 = 16.74. The total amount to be raised is 4,000,000+60,000 fees = 4,060,000.
Number of shares to be sold = 4,060,000/16.74 = 242,533
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