Young Corporation stock currently sells for $40 per share. There are 1 million s
ID: 2717306 • Letter: Y
Question
Young Corporation stock currently sells for $40 per share. There are 1 million shares currently outstanding. The company announces plans to raise $4 million by offering shares to the public at a price of $40 per share.
If the underwriting spread is 7%, how many shares will the company need to issue in order to be left with net proceeds of $4 million? (Do not round intermediate calculations. Round your answer to the nearest whole number.)
If other administrative costs are $65,000, what is the dollar value of the total direct costs of the issue?(Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
If the share price falls by 3% at the announcement of the plans to proceed with a seasoned offering, what is the dollar cost of the announcement effect? (Enter your answer in dollars not in millions.)
Young Corporation stock currently sells for $40 per share. There are 1 million shares currently outstanding. The company announces plans to raise $4 million by offering shares to the public at a price of $40 per share.
Explanation / Answer
a.
Underwriting spread is the amount taken by the underwriters to underwrite the issue.
Underwriting spread = 7%
Amount taken by the underwriters per share = $40 * 7% = $2.80
Amount left with the company per share = $37.20
No. of shares to be issued = $4,000,000 / $37.20 = 107,527 shares.
b.
Total proceeds from the issue = 107,527 * $40 = $4,301,080
Total underwriting spread cost = $4,301,080 - $4,000,000 = $301,080
Other administrative cost = $65,000
Total direct cost = $301,080+ $65,000 = $366,080
c.
The total market value of the stock is $40 million.
If the share price falls by 3% on the announcement of the offering, the existing shareholders suffer a loss in value of: 0.03 ´ $40 million = $1.2 million = $1,200,000
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