The Wrigley Corporation needs to raise $21 million. The investment banking firm

Question

The Wrigley Corporation needs to raise $21 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 $11.00 per share. The corporation will receive a net price of $10 per share. What is the percentage underwriting spread per share?

b= If bonds are utilized, slightly over 21,000 bonds will be sold to the public at $1,007 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= Which alternative has the larger percentage of spread?

d=

Is this the normal relationship between the two types of issues?

Explanation / Answer

a. Spread = $11 -$10 = $0.10 %

underwriting spread = $.10/$11 = 0.9%

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b. Spread = $1,007 -$998 = $9 %

underwriting spread = $9/$1,007 = .893%

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c. The stock alternative has the larger percentage spread.

This is normal because there is more uncertainty in the market associated with a stock offering and investment bankers want to be appropriately compensated.

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