Question

The Beach Company has a stock price of $30.00 and the company needs to raise $30 million in common stock. Underwriter's informed the company's management that the new issue to the public must be priced at $27.00 because of signaling effects. The underwriters' compensation (flotation expense) for the new stock issue will be 7% of the issue price. In addition to the underwriters' fee, The Beach Company will incur underwriting expenses of $200,000 for the new issue. How many shares must the firm sell to net $30 million for the company after underwriting and flotation expenses (rounded to the nearest whole share)?

Answer 1

$1,202,708.08 shares

Step-by-step explanation:

As mention in the question

Incur underwriting expenses = $200,000

The price of issue =$27.

also the is 7% of the price of the issue.

So the underwriter's expenses per sharing can be determined by

`price \ of \ issue * underwriters' \ compensation\\ =27* 7\%`

=$189%

=$1.89

proceeding from the share after the commission can be determined by

`=$277 - $1.89`

= $25.11

The company will incur the $200,000 of the extra underwriting expense. So the company needs the net proceeds of the $30 million.

So total underwriter's commission is=

`30,000,000+200,000`

= $30,200,000.

Therefore the net share can be determined by the

=
`(Total \ underwriting\ expenses )/(underwriter's \ compensation \ per \ share)`

=
`(30,200,000.)/(25.11)`

=$1,202,708.08 shares