Northern Airlines is about to go public. It currently has aftertax earnings of $6,000,000 and 4,000,000 shares are owned by the present shareholders. The new public issue will represent 300,000 new shares. The new shares will be priced to the public at $18 per share, with a 4 percent spread on the offering price. There will also be $100,000 in out-of-pocket costs to the corporation.
a. Compute the net proceeds to the Northern Airlines.
b. Compute the EPS immediately before the stock issue.
c. Compute the EPS immediately after the stock issue.
d. 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.
e. Determine what rate of return must be earned on the proceeds to the corporation so that there will be a 10 percent increase in EPS during the year of going public.