On a Saturday afternoon in May 2015, Robert Boyle and his wife Janet were sitting on the porch of their house on Saltspring Island, British Columbia, watching the fog roll in. The couple frequently spent weekends on the island, when the demands of Robert's business and Janet's teaching job would permit. Robert was the president of Robert Boyle & Associates, a closely held real estate investment trust (REIT) located in Vancouver, B.C. From a small office there, Robert had been managing the development of shopping centres for a little over eight years. Robert conducted most of the business himself, and the "associates," a group of about 40 friends, family members, and business colleagues, provided most of the financing. The trust had been quite successful, and today it owned two shopping centres, which produced rental income in 2014 of almost $6 million. (See Tables 1 and 2 for Boyle & Associates' financial statements for 2014.) "You know, Janet," Bob said wistfully, "we ought to move out here permanently.
There's just no comparison between life here and on the mainland."

Table 1

Robert Boyle & Associates
Income Statement
For the Year Ending 2014
(in millions)

Loan income............................................$0.240
Rental income...........................................5.992

Other income ...... .. ........ . .. ....................0.168

Total income .... .. ........ . .. .. .. . .. .............6.400
Amortization ............. ................................0.920
Genera l and administrative expense........0.435
Operating income ....................... . ...........5.045
Interest expense ............. . .. .. .. . ....... ...0.945
Net income..............................................$4.100
Dividend paid..........................................$4.100

Table 2

Robert Boyle & Associates
Balance Sheet
As of December 31, 2014
(in millions)

Assets

Cash and equivalents ................................ .$ 2.100
Land development and construction loans......2.000
Property owned, net of amortization ........... .16.000
Other assets ............................ . ....................0.900
Total assets ................... .. .. .. .. ................$21.000
Liabilities and Equity
Bank borrowings .............. .. .. .. .. . ..... .....$ 2.000
Mortgages on property ..... .. .. . . .. . ............7.000
Other liabilities ............. . .............................0.550
Total liabilities .... . . ........ .. .. .. .. ...... ..........9.550
Common stock ........ . ................................11.550
Retained earnings........................................0.000
Total equity ................ .. .. . . .. . ................11.550
Total liabilities and equity.........................$21.000

"You get no argument from me," Janet replied. "I've been telling you that ever since we bought this house."
"You could develop real estate just as easily from here as in the city, you know. Which reminds me, what's the latest on the Saltspring Centre project? You've been quiet about it for about a week now." Janet referred to a proposal Robert had made a few months ago to build the first shopping centre on Saltspring Island.
Robert sighed. "Well, it's on the back burner right now for lack of financing. I'm convinced that it would make us a lot of money; but, the trouble is, it will take a lot of money to get it built-about $10 million, in fact, and that's more than we've ever had to raise before."
"Oh, come on," Janet said. (She had always been an active participant in the business.) "You've built two shopping centres so far, and didn't have any trouble getting the money for them. Why don't you just borrow some more?"
"Too much borrowed already, I'm afraid," Robert replied. "Our debt-to-assets ratio is quite a bit over the average for REITs now, and our investment dealer says that another loan, or even a bond issue, would be quite expensive in terms of interest cost." (See Table 3 for comparisons between Boyle & Associates and a sample of other REITs.) "Well, what about the shareholders?" Janet insisted. "Can't they contribute some more equity money?" (Boyle & Associates' 40 existing shareholders held 4 million shares with a book value of$2.89 each.)
Robert responded with a smile. "You know the answer to that already," he said. "You and I are the biggest shareholders. But even if alJ 40 shareholders put in an equal amount it would cost each of us $250,000. You and I don't have that kind of cash, and I'm sure the rest of the shareholders don't either." "Well, then," Janet continued unperturbed, "you need some more shareholders. Why don't you sell shares to the public? I'm sure it would be a great success once people knew what the company's plans were."

"Yes, that's what our investment dealer said, too," Robert replied. "But I have some reservations. For instance, look at the dilution effect. You know, to qualify as a REIT and, therefore, to pay no income tax at the corporate level, we pay out 100 percent of earnings every year as dividends. Anything that affects earnings per share, then, affects the shareholders' dividends. If we issue a whole lot of new shares, earnings per share will be diluted severely, and the existing shareholders will be most unhappy!"

"But, Robert," Janet said, "aren't you ignoring the money you will make on the proceeds of the shares issue? It seems to me that the income from the investment ought to more than offset the initial dilution, producing even more earnings-and dividends-than before. Surely the shareholders will see that."
"Maybe so," Robert said, "but that's not the only problem. Suppose, for example, that the whole shopping centre deal falls through?" (It was not certain at this time that the residents and government authorities on Saltspring would approve the project.) "If it does, the price of our company's shares, now publicly traded, will surely fall, to the dismay and embarrassment of us all. You know, managing a publicly traded company is not at all like managing a private one. The pressure for short-term performance is terrific. If I don't produce, I'll be voted out of office at the next shareholders' meeting."
"And that's another thing," Robert continued, warming up, "shareholders' meetings. Look what you have to go through as a publicly traded company: shareholders' meetings, annual reports, B.C. Securities Commission filings , disclosure notices, regulators poking around; why, the administrative tasks alone will require a couple of full- time people! Besides that, look at the cost of the issue itself. The investment dealer will take a cut of about 6.5 percent of the issue, and we'll have to pay about $60,000 out of-pocket for legal and accounting fees and printing expenses. I bet we'd have to issue almost $11 million in shares just to get $10 million in cash. Pretty expensive!"
"Yes, that's so," Janet agreed. "But even so, the benefits might outweigh the costs. One thing you haven't mentioned is the increase in liquidity for the company's shares you would get if they were publicly traded. You know most of our existing shareholders have been with us for the whole eight years, and they have quite a bit of money tied up in this one basket. How can they diversify their portfolios or sell their holdings outright? I bet they'd love to see the shares publicly traded in the market with an established price." "All right, you may have a point," Robert conceded. "Tell you what, I'll write a letter to our existing shareholders outlining the pros and cons, and ask them to respond with recommendations. If the prevailing sentiment is to go public, we'll do it, and if it's not, we won't. In the end, though, the whole discussion may depend on how badly we want to build the Saltspring Centre. If we want it, we'llprobablyhave to go public to build it." "I knew you would have it all figured out," Janet said, approvingly. "Now, how about a martini?"

a. Refer to Table 3 for comparisons between Boyle & Associates and other REITs. The industry average P/E ratio. The investment dealer will set Boyle's P/E ratio based on how the company compares to the industry average in six areas: return on equity, return on assets, debt to assets, asset turnover, net profit margin, and five-year earnings per share growth. The investment dealer will start with the industry average P/E, and will add one-half point for each of the areas in which Boyle is superior to the industry, and will subtract one-half point for each area in which Boyle is inferior to the industry. After tabulating the results, the investment dealer will subtract one point for good measure to ensure the issue presents an attractive opportunity. On this basis, what will the dealer determine to be the proper P/E ratio for Boyle & Associates?
b. Considering that the dealer's spread will be 6.5 percent of the total issue size, and Boyle will have to pay $60,000 out-of-pocket expenses, what is the total issue size necessary to yield $10 million in cash to the company?
c. Assume 699,029 shares will be sold at a public price of $15.45 to provide approximately $10.8 million. What dollar return on the net proceeds of the offering must Boyle & Associates earn to bring earnings per share up to what it was before the offering ($1.03)? After you compute the dollar return on the net proceeds, convert this to a ratio (percentage of net proceeds). Compare this answer to Boyle's return on assets in 2014 (Table 3). Based on the company's performance in 2014, do you think the required return can be earned?

d. If half of Boyle's associates decide to sell their existing shares in addition to the initial offering, how many total shares will have to be issued by the company to yield $10 million in cash to the company?
e. Summarize the pros and cons of Boyle & Associates going public. Based on Robert Boyle's letter, would you recommend going public or not? What would be the major reason affecting your opinion?

Table 3

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Number Long- of Total Net Total term debt Company revenue income equity $ 24.0 shares 1.423 $ 4.3 $ 2.6 $ 3.1 JKL Realty Trust. UVW REIT.. Cousins Properties Inc. Bradley REIT... Mortgage Growth Investors Inc.. Dial REIT (newly established) Average of companies listed Robert Boyle & Associates 7.8 1.5 21.2 2.500 12.3 52.5 29.6 17.165 110.7 14.1 3.360 7.1 1.3 11.0 6.8 19.8 14.0 9.9 7.730 123.9 31.3 1.736 10.3 5.653 14.3 7.5 13.3 51.5 6.4 4.1 4.000 9.5 11.6 Total Earnings per share $1.83 Dividend Book value per share $1.75 Company per share $16.84 assets JKL Realty Trust.. UVW REIT.. Cousins Properties Inc. Bradley REIT..... Mortgage Growth Investors Inc.. Dial REIT (newly established) . Average of companies listed Robert Boyle and Associates $ 27.1 33.5 4.92 0.60 0.57 124.8 1.72 1.64 6.45 0.39 17.8 0.37 2.01 1.28 143.7 1.23 16.03 41.6 1.64 18.02 64.7 0.97 1.20 10.71 1.03 0.98 21.0 2.89 Net Debt to assets Asset profit Company ROE ROA turnover margin JKL Realty Trust.. UVW REIT..... Cousins Properties Inc. Bradley REIT.. Mortgage Growth Investors Inc.. Dial REIT (newly established) Average of companies listed Robert Boyle and Associates 10.8% 9.6% 0.11 0.16 60.5% 12.2 4.5 0.63 0.23 19.2 26.7 23.7 0.11 0.42 56.4 19.2 7.3 0.62 0.40 18.3 8.0 6.9 0.14 0.10 70.9 0.25 12.8 8.7 0.31 0.22 37.5 35.5 19.5 0.45 0.30 64.1 5-Year Recent EPS Dividend share P/E ratio Company JKL Realty Trust.. UVW REIT.... Cousins Properties Inc. Bradley REIT.... Mortgage Growth Investors Inc.. Dial REIT (newly established) Average of companies listed Robert Boyle and Associates. growth 1.1% yield 11.7% price $15.00 8.2 8.1 5.8 16.3 9.75 2.9 9.8 9.7 16.75 12.3 2.8 34.2 13.25 IE .... 7.1 6.2 15.5 19.88 8.5 19.25 5.3 7.5 14.0 15.65 9.7