Question

Magenta Corporation wants to raise $50.9 million in a seasoned equity offering, net of all fees. Magenta stock currently sells for $15 per share. The underwriters will require a spread of $0.6 per share, and indicate that the issue must be underpriced by 6 percent. In addition to the underwriter’s fee, the firm will incur $1,900,000 in legal, accounting, and other costs. How many shares must Magenta sell? (Enter your answer in millions rounded to 3 decimal places.)

Answer 1

Given,

Amount to raise = $50.9 million

Current share price = $15 per share

Underwriter share = $0.6 per share

Under-pricing rate = 6% or 0.06

Legal, accounting and other costs = $1900000 or $1.9 million

Solution :-

Issue price = Current share price x (1 - under pricing rate)

= $15 per share x (1 - 0.06)

= $15 per share x 0.94 = $14.10 per share

Total amount required = Amount to raise + Legal, accounting and other costs

= $50.9 million + $1.9 million = $52.8 million

Shares to sell = Total amount required (issue price - underwriter share)

= $52.8 million ($14.10 - $0.6)

= $52.8 million $13.50 = 3.911 million shares

So, Magenta must sell 3.911 million shares