Jack's Camping Equipment needs $30 million to ﬁnance a new facility to manufacture outdoor grills. The management has met with underwriters who feel that the ﬁrm could sell additional shares of
Stock at $19 a share with a 7 percent underwriting spread. The estimated issue costs are $315,000.
How many shares of stock will Jack's need to sell if they choose ﬁrm commitment underwriting for
Their new facility?

Question

Quizplus · Accepted Answer

To calculate the number of shares Jack's Camping Equipment needs to sell, we need to first calculate the total amount of money raised from selling shares.

The underwriting spread is 7%, which means Jack's Camping Equipment will receive 93% of the proceeds from the sale of shares.

Total amount of money raised = Amount needed for new facility / (1 - underwriting spread) 
Total amount of money raised = $30,000,000 / (1 - 0.07) = $32,258,065.22

Next, we need to divide the total amount of money raised by the offer price per share:

Number of shares to be sold = Total amount of money raised / Offer price per share 
Number of shares to be sold = $32,258,065.22 / $19 = 1,698,320.8

However, we need to subtract the estimated issue costs of $315,000 from the total amount of money raised:

Number of shares to be sold = ($32,258,065.22 - $315,000) / $19 = 1,715,620.26

Therefore, Jack's Camping Equipment needs to sell approximately 1,715,620 shares of stock if they choose firm commitment underwriting for their new facility. The closest option is D) 1,715,620 shares.

Jack's Camping Equipment Needs $30 Million to ﬁNance a New