Your company needs to raise $4 million to finance plant expansion. In discussions with its investment bank, you learn that the bankers recommend a gross price of $50 per share and that 90,000 shares of stock be sold. If the net proceeds on the stock sale leaves your company with $4 million, what is the underwriter's spread per share on the stock issue?

Question

Quizplus · Accepted Answer

The underwriter's spread per share can be calculated by first determining the total amount raised before the underwriter's fees are subtracted, which is $50 per share times 90,000 shares, equaling $4.5 million. Since the company needs to net $4 million, the difference of $0.5 million is the total underwriter's fees. Dividing this amount by the number of shares (90,000) gives the per-share spread: $0.5 million / 90,000 shares = $5.55 per share.

Your Company Needs to Raise $4 Million to Finance Plant