Magenta Corporation wants to raise $50 million in a seasoned equity offering, ne

Question

Magenta Corporation wants to raise $50 million in a seasoned equity offering, net of all fees. Magenta stock currently sells for $10 per share. The underwriters will require a spread of $0.50 per share, and indicate that the issue must be underpriced by 5 percent. In addition to the underwriter's fee, the firm will incur $1 million in legal, accounting, and other costs. How many shares must Magenta sell?

I know that I need to calculate the amount the company will net from the sale per share which I got $9.03. But, when I am figuring out the total number of shares Magenta must sell do I need to add in the $1 million because that is a cost they will need covered? So would it be $60 milliion/$9.03?

Explanation / Answer

Net sale price per share = (10-0.50)*(1-5%) = $ 9.025

Company must raise = Net Fund Required +  legal, accounting, and other costs

Company must raise = $ 50 Millio + $ 1 Million

Company must raise = $ 51 Million

No of shares must Magenta sell = Amount Required / Sale price per share

No of shares must Magenta sell = 51,000,000/9.025

No of shares must Magenta sell = 5,650,969.53

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.