Question

The Wrigley Corporation needs to raise $24 million. The investment banking firm of Tinkers, Evers & Chance will handle the transaction. a. If stock is utilized, 2,100,000 shares will be sold to the public at $12.25 per share. The corporation will receive a net price of $11.50 per share. What is the percentage underwriting spread per share? b. If bonds are utilized, slightly over 24,150 bonds will be sold to the public at $1,003 per bond. The corporation will receive a net price of $998 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price.) c-1. Which alternative has the larger percentage of spread? STOCK/BOND c-2. Is this the normal relationship between the two types of issues? YES/NO

Answer 1

(a) Stock: Public Offer Price = $ 12.25 and Net Price Received = $ 11.5

% Underwriting Spread per Share = [(12.25 - 11.5) / 12.25] x 100 = 6.1224 % ~ 6.12 %

(b) Stock: Public Offer Price = $ 1003 and Net Price Received = $ 998

% Underwriting Spread per Share = [(1003 - 998) / 1003] x 100 = 0.4985 % ~ 0.5 %

(c) As is observable, the stock issue has the larger % spread.

(d) Historically, stock spreads have been greater than bond spreads more often than not. Answer: YES