Future Technology wants to raise $15 million to purchase equipment by issuing new securities.Management estimates the issue will cost the firm $926,250 for accounting, legal, and other costs.The underwriting spread is 6 percent and the issue price is $25 per share.How many shares of stock must be sold if the firm is to have sufficient funds remaining after costs to purchase all of the desired equipment?

Question

Quizplus · Accepted Answer

First, we need to calculate the total costs of the issue, which include the accounting, legal, and other costs as well as the underwriting spread.

Total issue costs = accounting, legal, and other costs + underwriting spread

Total issue costs = $926,250 + 6%($15,000,000)

Total issue costs = $1,926,250

Next, we need to calculate how much money the firm will raise after deducting the total issue costs from the proceeds of the sale.

Net proceeds from sale = issue price × number of shares sold - total issue costs

$15,000,000 = $25 × number of shares sold - $1,926,250

$15,000,000 + $1,926,250 = $25 × number of shares sold

$16,926,250 = $25 × number of shares sold

number of shares sold = $16,926,250 ÷ $25

number of shares sold = 677,713

Therefore, the firm must sell 677,713 shares to raise $15 million after accounting for all costs associated with the issue. The answer is C).

Future Technology Wants to Raise $15 Million to Purchase Equipment