Question

Young corporation stock currently sells for $30 per share. there are 1 million shares currently outstanding. the company announces plans to raise $3 million by offering shares to the public at a price of $30 per share. if the underwriting spread is 6%, how many shares will the company need to issue in order to be left with net proceeds (before other administrative costs) of $3 million?

Answer 1

To determine the number of shares the company needs to issue to be left with $3 million in net proceeds, we consider the underwriting spread. By solving the equation x * 0.94 * $30 = $3 million, we find that the company needs to issue approximately 107,526 shares.

Step-by-step explanation:

To calculate the number of shares the company needs to issue in order to be left with net proceeds of $3 million, we need to consider the underwriting spread and the desired net proceeds. The underwriting spread is given as 6%, which means the investment bank that handles the stock issuance will take 6% of the total proceeds as fees.

Let's denote the number of shares to be issued as 'x'. The total proceeds from the sale of these shares will be x * $30. From this amount, 6% will be subtracted as the underwriting spread. So we have the equation:

x * $30 - 6% * x * $30 = $3 million

Simplifying this equation, we find:

x * (1 - 6%) * $30 = $3 million

which can be rewritten as:

x * 0.94 * $30 = $3 million

Dividing both sides of the equation by $30 * 0.94, we get:

x = $3 million / ($30 * 0.94)

Calculating this expression, the company will need to issue approximately 107,526 shares in order to be left with net proceeds of $3 million.