Question

Young Corporation stock currently sells for $30 per share. There are 1 million shares currently outstanding. The company announces plans to raise $5 million by offering shares to the public at a price of $30 per share.

a. If the underwriting spread is 7%, how many shares will the company need to issue in order to be left with net proceeds (before other administrative costs) of $5 million ? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

b. If other administrative costs are $60,000, what is the dollar value of the total direct costs of the issue? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

c. If the share price falls by 5% 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 millions.)

Answer 1

a)

Step 1:- Calculating the net share price to be received.

NSP = Share Price * (1 - Underwriting commission)

= $30 * (1 - 0.07)

= $27.90

Step 2:- Calculating the number of shares to be left with net proceeds of $5 million.

Number of shares = Net proceeds / NSP

= $ 5,000,000 / $27.90

= 179,211.46

= 179,212 shares, are to be issued.

b)

Step 1:- Calculating the under writing cost.

UC = Gross proceeds - Net proceeds

= (179,212 * $30) - ($5,000,000)

= $ 376,360

Step 2:- Calculating total direct cost.

TDC = UC + Administrative cost

= $376,360 + $60,000

= $436,360

c)

Calculating cost of announcement effect.

CAE = Market value of share * Percentage fall in price

= (1,000,000* $30) * 0.05

= $1,500,000