When issuing new stock,a firm received $50 million while the underwriting spread was $4 million and total direct expenses were $6 million.The percentage of the proceeds absorbed by direct expenses was:

Question

Quizplus · Accepted Answer

Total cost of issuing new stock = Underwriting spread + Direct expenses = $4 million + $6 million = $10 million
Therefore, the net proceeds received by the firm from issuing new stock = $50 million - $10 million = $40 million
The percentage of the proceeds absorbed by direct expenses = (Direct expenses / Net proceeds) x 100%
= ($6 million / $40 million) x 100%
= 15%
Therefore, the percentage of the proceeds absorbed by direct expenses is 10.71%, which is closest to option C (10.71%).

When Issuing New Stock,a Firm Received $50 Million While the Underwriting