Managerial Finance

Chapter I 8 Public and Private Financing: Initial Offerings, Seasonetl Offerings, and Investment Banks

The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

a. $5 per share b. $6 per share c. $4 per share

The Beranek Company, whose stock price is now $2,5, needs to raise $20 million in common stock. Underwriters have informed the firm's management that they must price the new issue to the public at $22 per share because of signaling effects. 'Ihe underwriters' compensation will be 5% of the issue price, so Beranek will net $20.90 per share. The firm wili also incur expenses in the amount of $150,000.

How many shares must the firm sell to net $20 million aller underwriting and flotation expenses?

Intermediate

- (1s-3)

Pricing Stock Issues . Benjamin Garcia's start-up business is succeeding, but he needs $200,000 in additional

$*di"g to fund continued growth. Benjamin and an angel investor agree the business is $800,000 and the angel has agreed to invest the $200,000 that is Benjamin

and howP owns all 40,000 shares in his business. What is a fair price per many shares must Benjamin sell to the angel? Because the will be sold directly to an , there is no spread; the other flotation costs are insignificant.

(18-4)

Nerru Stock Issue

Bynum and Inc. (B&C), a small jewelry manufactureryfas been successfirl and has enjoyed a positive common stock, and it

trend. Now B&C is planning ta1{o public with an issue of problem of setting an te price for the stock. The

company and its investment believe that the is to conduct a valuation and select several relevant comparisons.

with publicly common stock and to make

Several jewehy manufacturers are to B&C with respect to product mix, asset composition, and debt/equity Of these companies, Abercrombe Jewelers and Gunter Fashions are most si When analyzing the following data, assume that the most recent year has been y "normal" in the sense that it was neither especiaily good nor especially terms earnings, and free cash flows. Abercrombe is listed on the AMEX the NASDAQ market.

on the while B&C will be traded in

Company Data

Shares outstanding

Price per share

Earnings per share

Free cash florv

Book value per

Total assets

million

$3s.00

$2.20

$ 1.63

$16.00

$115 million

$35 million

Gunter

10 million

$47.00

si- l -1

$2.54

$20.00

$250 rnillion

$50 million

B&C

500,000

A

$2.00

$18.00

$11 million

$2 millionTotal

Underwriting and