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A year ago
1. Flyrite Company currently has net income of $3 million and 1.5 million common shares outstanding which sell for $20/share. Flyrite has decided to issue new stock to raise $4,000,000 to expand its operations. Flyrite's investment dealer will sell the stock for $18 with a spread of 7%. There will be a $60,000 registration cost.

A) Calculate current EPS and PE ratio.
B) How many shares will have to be sold to net $4 million?
C) Calculate new EPS and stock price immediately after the sale if the PE ratio remains constant.


2. An investment dealer makes its money from

A. commissions from buyers.
B. fees from other investment dealers in the syndicate.
C. artificially supporting the share price during and after the offering.
D. none of the other answers are correct.

3. Which of the following is considered an advantage (for the corporation) of going public?

A. the president becomes a public relations man
B. extensive and time-consuming reporting requirements
C. the cost of flotation
D. none of the other answers are correct.
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wrote...
Staff Member
A year ago
 Here is the solution for Q2 and Q3. I will post the solution for Q1 shortly.
2. D. none of the other answers are correct.

3. C. the cost of flotation
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Answer verified by a subject expert
wrote...
Staff Member
Top Poster
Posts: 1555
A year ago
A) \(EPS=\frac{3\ million}{1.5\ million\ share}=2.00\)

\(\frac{P}{E}ratio\ =\ \frac{20.00}{2.00}=10x\)


B) $4,000,000      total needed
          $60,000      registration cost

    $4,060,000       to be rasied

\(No.\ shares\ =\ \frac{4,060,000}{\Pr ice\ -Spread}=\frac{4,060,000}{18.00-1.26}=\frac{4,060,000}{16.74}=242,533\)

C) \(new\ EPS=\frac{3\ million}{1,500,000+242,533}=1.722\)


New stock price = $1.722 x 10 = $17.22
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