Question

2. United Uninsured Underwriters (U3) needs to raise $192 million. If it issues new common stock to raise the funds, the flotation costs will be 8 percent. The new issue will also require U3 to pay $280,000 in fees to its lawyers, printing costs, and other costs associated with the issue. U3 can issue stock at $25 per share. How many shares of common stock must be issued so that it has $192 million after flotation costs? Show how much of the total dollar amount will be flotation costs and how much U3 will receive after the flotation costs are paid.

Answer 1

Let x denote the no of shares of common stock to be issued by UUU at a price of $25 per share

Therefore, the total money raised is $24 * x

Given that UUU has to incur flotation cost of 8% plus additional costs of $280,000, the total flotation costs work out to $25 * x * 0.08 + $280,000

Since UUU needs $192 million, calculation of the value of x is as follows:

$25 * x - ($25 * x * 0.08 + $280,000) = $192 million

$25 * (1-0.08) * x = $192 million + $280,000

x = 192.28 million/25 * 0.92

x = 8.36 million

Therefore, UUU has to issue 8,360,000 shares of common stock at $25 to obtain its funding need of $192 million

The flotation costs would be $25 * 8,360,000 * 0.08 + $280,000 = $17 million

Out of the total money raised of 8,360,000 * $25 = $209 million, after deducting the flotation costs of $17 million, UUU will receive $192 million