Question

Pawprints Paint recently went public in a best efforts offering. The company offered 105,000 shares of stock for sale at an offer price of $45 per share. The administrative costs associated with the offering were $345,000 and the underwriter's spread was 7 percent. After completing their sales efforts, the underwriters determined that they sold a total of 100,100 shares. What were the net proceeds to the company? Multiple Choice $3,844,185 $4,189,185 $3,704,250 $3,499,185 $4,049,250

Answer 1

Introduction

The question indicates best effort offering. In this type of underwriter service, liability of buying unsubscribed shares shall not be assumed by underwriter. So proceeds shall be received only for those best sold by them after excluding the underwriter's spread and administrative cost.

Answer

Option - A .............. 3,844,185

Explanation

Net proceeds to company ( Best effort offering)

= Number of shares sold by underwriter * Offer price * ( 1 - spread) - Cost of issue.

= 100,100 * 45 * ( 1 - 0.07) - 345,000

= 3,844,185