Question

Macho Tool Company is going public at $50 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering, the firm had $48 million in earnings divided over 12 million shares. The public offering will be for six million shares; four million will be new corporate shares and two million will be shares currently owned by the founding stockholders.

a. What is the immediate dilution based on the new corporate shares that are being offered?
b. If the stock has a P/E of 20 immediately after the offering, what will the stock price be?
c. Should the founding stockholders be pleased with the $50 they received for their shares?