Question

Zonk Company needs to raise $47.5 million to fund a new project. The company will sell shares at a price of $27.90 in a general cash offer and the company's underwriters will charge a spread of 6 percent. The direct flotation costs associated with the issue are $650,000. How many shares need to be sold?

Answer 1

Zonk Company

The number of shares that needs to be sold is:

= 1,842,569 shares.

Step-by-step explanation:

a) Data and Calculations:

Amount needed to fund a new project = $47,500,000

Selling price per share = $27.90

Proceed per share after underwriter's spread = $26.132 ($27.80 * (1 - 0.06)

Underwriters spread per share = 6% * $27.80 = $1.668

Direct flotation costs = $650,000

Number of shares to float = ($47,500,000 + $650,000)/$26.132

= 1,842,569 shares

Expanded Proof:

Proceeds from share issue = $51,223,418 (1,842,569 * $27.80)

less underwriter's spread = 3,073,405 (1,842,569 * $1.668)

Net proceeds before flotation $48,150,013

less direct flotation costs = 650,000

Funds raised = $47,500,013