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 20X1 Sales (all on credit)........ Cost of goods sold. Gross

Assets Current assets Cash BAILEY CORPORATION Balance Sheet As of December 31, 20X1 Marketable securities

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?