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Compute the EPS immediately before the stock issue

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Question - Waterloo Company is about to go public. It currently has after tax earnings of $100,000,000 and 50,000,000 shares are owned by the present shareholders. The new public issue will represent 750,000 new shares. The new shares will be priced to the public at $30 per share, with a 5 percent spread on the offering price. There will also be $250,000 in out-of-pocket costs to the corporation.

Current rate of return is 10% for Waterloo company.

Waterloo company has numerous profitable projects for future development which require additional financing. Currently due to debt covenant restrictions Waterloo can not obtain additional loans. In addition, CFO of Waterloo company Karen Chen has stock option to buy 100,000 shares of Waterloo company with exercise price of $8 which are all currently vested (exercisable).

Required -

a) Compute the net proceeds to the Waterloo Company.

a) Compute the EPS immediately before the stock issue.

b) Compute the EPS immediately after the stock issue.

c) Determine what rate of return must be earned on the net proceeds to the corporation so that there will not be a dilution in EPS during the year of going public.

d) Based on information provided should Waterloo go public? Provide quantitative and qualitative analysis (for qualitative analysis include at least one advantage and one disadvantage of going public) and final conclusion.

Reference no: EM132679534

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