Question

The Whistling Straits Corporation needs to raise $30 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $30 per share and the company's underwriters charge a 11 percent spread, how many shares need to be sold?

Multiple Choice

• 1,168,539

• 1,000,000

• 1,078,652

• 1,123,596    

• 900,901

Answer 1

Solution :-

Required Amount = $30 million = $30,000,000

Offer price = $30

Underwriting spread = 11% or 0.11

So, net proceeds per share =

= Offer price ( 1- underwriting spread)

= $30 (1- 0.11)

= $30 ( 0.89)

= $26.7

It means the company will get only $26.7 on every share to be issued.

And the company requires $30,000,000

So, the number of share to be sold by the company :-

= Required Amount / Net proceeds per share

= $30,000,000 / $26.7

= 1,123,595.51

Or 1,123,596 shares (approx)

So, the company has to sell 1,123,596 shares to finance its expansion.