Question

When Microsoft went public, the company sold two million new shares (the primary issue). In addition, existing shareholders sold 0.9 million shares (the secondary issue) and kept 21.4 million shares. The new shares were offered to the public at $19 and the underwriters received a spread of $1.31 a share. At the end of the first day’s trading, the market price was $38 a share.

a.	How much money did the company receive before paying its portion of the direct costs? (Round your answer to 2 decimal places.)
	Sum of money the company received	$ million

b.	How much did the existing shareholders receive from the sale before paying their portion of the direct costs? (Round your answer to 3 decimal places.)
	Sum of money the existing shareholders received	$ million

c.	If the issue had been sold to the underwriters for $33 a share, how many shares would the company have needed to sell to raise the same amount of cash? (Round your answer to 3 decimal places.)
	Number of shares	million

d.	How much better off would the existing shareholders have been? (Round your answer to 3 decimal places.)
	Increase in shareholders' proceeds	$ million

Answer 1

a). The price of each share, net of the underwriting spread = $19 - $1.31 = $17.69.

Company received = Primary Issue Shares x Net Price = 2 million × $17.69 = $35.38 million

b). Total proceeds = Secondary Issue Shares x Net Price = 900,000 × $17.69 = $15.921 million.

c). Number of shares = Sum of money the company received / Price paid by underwriters

= $35.38 million / $33 = 1.072 million

d). Increase in shareholders' proceeds = Secondary Issue Shares x (Price paid by underwriters -

Net Price)

= 900,000 x ($33 - $17.69) = $13.779 million