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Jordan Broadcasting Company is going public at $50 net per share to the company
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 five million shares; three 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 30 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?
Expert Solution
a.
Existing shares= 11,000,000
New shares= 3,000,000
Total shares= 14,000,000
Earnings= $26,000,000
Earnings per share before offering = 26000000/11000000 = $ 2.36
Earnings per share after offering =26000000/14000000 = $1.88
Immediate earning dilution =2.36 - 1.88 = $0.48 per share
b.
P/E= 30
E= $1.88
Therefore, Price =30x1.88 = $56.4
c. No because the current stock price is more than what they got for selling their shares.
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