Woods Inc. is a provincially incorporated company working in software development. The company was initially owned by a group of 40 investors that included the four original founders, their friends and families, and employees. The company is authorized to issue 50 million common shares; at the beginning of 2011 there were 1 million outstanding, with all of them owned by the initial group. The recorded value of these shares was $2.5 million. Due to the company’s rapid success, management decided to raise funds for further growth by issuing more shares. In 2011, the company went public with an initial public offering (IPO) that sold 5 million shares and raised $50 million. Other information is as follows:
1. After losses in the early years, the company recently had positive earnings. The opening balance of retained earnings on January 1, 2011, was $1,200,000.
2. In 2011, net earnings were $2,500,000.
3. On December 31, 2011, the shares were trading at $10.50.
Required:
a. What percentage of the company does the original group of investors own after the IPO? How could the group have maintained their control of the company? How would that have likely influenced the price of the shares sold?
b. Calculate and compare the book value and market value of Woods Inc. on December 31, 2011. Explain why they might be different.
c. What was the EPS amount for 2011 based on the end of year number of shares outstanding?
d. If you were an investor who bought shares in the IPO, would you be surprised that dividends were not paid in 2011?