Question

P7–1 Authorized and available shares Aspin Corporation’s charter authorizes issuance of 2,000,000 shares of common stock. Currently, 1,400,000 shares are outstanding, and 100,000 shares are being held as treasury stock. The firm wishes to raise $48,000,000 for a plant expansion. Discussions with its investment bankers indicate that the sale of new common stock will net the firm $60 per share.

1. What is the maximum number of new shares of common stock the firm can sell without receiving further authorization from shareholders?

2. Judging by the data given and your finding in part a, do you think the firm will be able to raise the needed funds without receiving further authorization?

3. What must the firm do to obtain authorization to issue more than the number of shares found in part a?

Answer 1

Answer : a.) Maximum number of new shares of common stock taht the firm can sell without receiving further authorization from shareholders

Authorized shares = 2,000,000

Shares outstanding = 1,400,000

Available shares = Authorized Shares - Shares Outstanding

= 2,000,000 - 1,400,000

= 600,000 shares

b.)

Total Funds needed for a plant expansion = $ 48,000,000

Total shares needed = Funds Needed / Selling Price of Shares

= 48,000,000 / 60

= 800,000 shares

Therefore The firm requires an additional 200,000 authorized shares to raise the necessary funds at $60 per share because as per part (a) total funds that could be collected by the firm = (New share issue + Treasury stock) = (600,000 + 100,000) * 60 = 42,000,000

c ). Aspin Corporation should amend its corporate charter to authorize the issuance of additional shares found in part (a.)