The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to

Question:

The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

BAILEY CORPORATION

Income Statement

For the Year 201X

Sales (all on credit)........................................... $42,680,000

Cost of goods sold............................................ 32,240,000

Gross profit....................................................... 10,440,000

Selling and administrative expenses................. 4,558,000

Operating profit................................................ 5,882,000

Interest expense................................................ 600,000

Net income before taxes................................... 5,282,000

Taxes................................................................. 2,120,000

Net income........................................................ $ 3,162,000

BAILEY CORPORATION

Balance Sheet

As of December 31, 201X

Assets

Current assets

Cash............................................................. $ 250,000

Marketable securities................................... 130,000

Accounts receivable..................................... 6,000,000

Inventory..................................................... 8,300,000

Total current assets.................................... $14,680,000

Net plant and equipment.................................. 13,970,000

Total assets........................................................ $28,650,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable......................................... $ 3,800,000

Notes payable.............................................. 3,550,000

Total current liabilities............................. 7,350,000

Long-term liabilities.......................................... 5,620,000

Total liabilities................................................... $12,970,000

Stockholders’ equity:

Common stock (1,800,000 shares at $1 par). $ 1,800,000

Capital in excess of par................................. 6,300,000

Retained earnings......................................... 7,580,000

Total stockholders’ equity.......................... 15,680,000

Total liabilities and stockholders’ equity.......... $28,650,000

a. Assume that 800,000 new corporate shares will be issued to the general public. What will earnings per share be immediately after the public offering? (Round to two places to the right of the decimal point.) Based on the price-earnings ratio of 12, what will the initial price of the stock be? Use earnings per share after the distribution in the calculation.

b. Assuming an underwriting spread of 5 percent and out-of-pocket costs of $300,000, what will net proceeds to the corporation be?

c. What return must the corporation earn on the net proceeds to equal the earnings per share before the offering? How does this compare with current return on the total assets on the balance sheet?

d. Now assume that, of the initial 800,000-share distribution, 400,000 belong to current stockholders and 400,000 are new shares, and the latter will be added to the 1,800,000 shares currently outstanding. What will earnings per share be immediately after the public offering? What will the initial market price of the stock be? Assume a price-earnings ratio of 12 and use earnings per share after the distribution in the calculation.

e. Assuming an underwriting spread of 5 percent and out-of-pocket costs of $300,000, what will net proceeds to the corporation be?

f. What return must the corporation now earn on the net proceeds to equal earnings per share before the offering? How does this compare with the current return on the total assets on the balance sheet?

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