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BUSI 530 Chapter 15
2.YoungCorporationstockcurrentlysellsfor$20pershare.Thereare1
millionsharescurrentlyoutstanding.Thecompanyannouncesplansto
raise$2millionbyofferingsharestothepublicatapriceof$20per
share.
a.Iftheunderwritingspreadis4%,howmanyshareswillthecompany
needtoissueinordertobeleftwithnetproceeds(beforeother
administrativecosts)of$2million?(Do not round intermediate
calculations. Round your answer to the nearest whole
number.)
+/-
1.Moonscapehasjustcompletedaninitialpublicoffering.Thefirmsold
6millionsharesatanofferpriceof$6pershare.Theunderwriting
spreadwas$0.40ashare.Thepriceofthestockclosedat$9.00per
shareattheendofthefirstdayoftrading.Thefirmincurred$100,000in
legal,administrative,andothercosts.Whatwereflotationcostsasa
fractionoffundsraised?(Do not round intermediate
calculations. Enter your answer as a percent rounded to
2 decimal places.)
Number of shares
Costs as percent of funds raised
104,167
56.94 %
0.1%
+/-1%
Explanation
Some values below may show as rounded for display purposes, though unrounded
numbers should be used for actual calculations.
Funds raised=Shares issued × Offer price per share
=6 million × $6
=$36 million
Cost
percent=(Underwriting cost + Underpricing + Other direct costs) / Funds raised
age
={(6 million × $0.40) + [6 million × ($9 – 6)] + $100,000} / $36 million
=$20.5 million / $36 million
=0.5694, or 56.94%
Total direct costs+/-0.1%$113,333
c.Ifthesharepricefallsby2%attheannouncementoftheplansto
proceedwithaseasonedoffering,whatisthedollarcostofthe
announcementeffect?(Enter your answer in dollars not in
b.Ifotheradministrativecostsare$30,000,whatisthedollarvalueo
f thetotaldirectcostsoftheissue?
millions.)
(Enter your answer in dollars
not in millions. Do not round intermediate calculations.
Round your answer to the nearest whole dollar
amount.)
Cost of the announcement effect $400,000
+/-0.1%
Somevaluesbelowmayshowasroundedfordisplaypurposes,thoughunroundednumbers
shouldbeusedforactualcalculations.
a.
Numb
er of =[Desired net proceeds / (1 – Spread)] / Offer price
share
s
=[$2,000,000 / (1 – 0.04)] / $20
=104,167 shares
Tota
l
dire
ct =Underwriting cost + Other direct costs
cost
s=[(Number of shares × Issue price) – Net proceeds] + Other direct cost
=[(104,167 × $20) – $2,000,000] + $30,000
$113,333
c.
Announcem
ent cost=Market value of stock × Percentage change in price
=(Number of shares currently outstanding × Market price per
share) × Percentage
=(1 million × $20) × 0.02
$400,000
b.
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