Sipe's Paint and Wallpaper, Inc., needs to raise $1 million to finance plant expansion. In discussions with its investment bank, Sipe's Paint and Wallpaper learns that the bankers recommend a gross price of $40 per share and that 30,000 shares of stock be sold. If the net proceeds on the stock sale leave Sipe's Paint and Wallpaper with $1 million, what percent of the stock price does the underwriter's spread represent?

Question

Quizplus · Accepted Answer

The underwriter's spread is the difference between what the company receives per share and what the share is sold for. If Sipe's Paint and Wallpaper needs to raise $1 million from selling 30,000 shares, then they receive $1,000,000 / 30,000 = $33.33 per share. The gross price is $40, so the spread is $40 - $33.33 = $6.67. The percent of the stock price this represents is ($6.67 / $40) * 100 = 16.67%.