Fun 'N Fast Games needs $21 million to ﬁnance its latest venture. The company plans to fund this project by issuing new shares of common stock at a market price of $46 a share. The indirect costs
Of the issue are $85,000, the direct costs are $900,000, and the underwriting spread is 7.5%. How
Many shares of stock must Fun 'N Fast issue to fully fund their venture?

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost of issuing new shares:
Direct costs = $900,000
Underwriting spread = 7.5% of $21 million = $1,575,000
Indirect costs = $85,000
Total cost = Direct costs + Underwriting spread + Indirect costs = $2,560,000

Next, we need to calculate the net proceeds from the new shares:
Market price per share = $46
Gross proceeds per share = $46
Underwriting spread per share = $46 x 7.5% = $3.45
Net proceeds per share = $46 - $3.45 = $42.55

Shares needed = Total cost / Net proceeds per share = $2,560,000 / $42.55 = 60,185.91
Since shares must be whole numbers, we round up to the nearest whole number to get:
Shares needed = 60,186

Therefore, the answer is C) 516,686.

Fun 'N Fast Games Needs $21 Million to ﬁNance Its