Renee's Boutique, Inc., needs to raise $25 million to finance firm expansion. In discussions with its investment bank, Renee's Boutique learns that the bankers recommend an offer price of $9 per share and that 5 million shares of stock be sold. If the net proceeds on the stock sale leaves Renee's Boutique with $25 million, calculate 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 expenses, which is $9 per share times 5 million shares, equaling $45 million. Since Renee's Boutique needs to net $25 million, the difference of $20 million is the total underwriting fees. Dividing this $20 million by the 5 million shares gives an underwriter's spread of $4 per share.