Mesmer Analytic, a biotechnology firm, floated an initial public offering of 2,000,000 shares at a price of $5.00 per share.The firm's owner/managers held 60 percent of the company's $1.00 par value authorized and issued stock following the public offering.One month after the IPO, the firm's board of directors declared a one-time dividend of $0.50 per share payable to all stockholders, meaning that the owner/managers would receive an immediate dividend, in part out of the pockets of the new public stockholders.What was the book value per share of the firm before and after the special dividend was paid?

Question

Quizplus · Accepted Answer

Before the dividend, the book value per share is calculated as the total equity divided by the total number of shares. After the IPO, the equity is $10,000,000 (from the IPO) plus the par value of the owner's shares. The book value per share before the dividend is $2.60. After paying a $0.50 dividend per share, the book value per share decreases by $0.50, resulting in a book value of $2.10.

Mesmer Analytic, a Biotechnology Firm, Floated an Initial Public Offering