Phillip's Manufacturing wants to raise $15 million to open a new production center. The company estimates the issue costs including the legal and accounting fees will be $530,000. The
Underwriters have set the stock price at $23 a share and the underwriting spread at 8.5 percent.
How many shares of stock does Phillip's have to sell to meet their cash need?

Question

Quizplus · Accepted Answer

To determine the number of shares to sell, we need to first calculate the total cost of issuing the stock:

Total cost = amount needed + issue costs
Total cost = $15,000,000 + $530,000
Total cost = $15,530,000

Next, we need to determine how much the underwriting spread will add to the cost of issuing the stock:

Underwriting spread = stock price x underwriting spread percentage
Underwriting spread = $23 x 8.5% = $1.955

The underwriting spread is the difference between the price the underwriter pays Phillip's Manufacturing per share and the price they sell the shares to the public. Therefore, the underwriter will pay Phillip's Manufacturing $23 - $1.955 = $21.045 per share.

Finally, we can determine the number of shares to sell:

Number of shares = total cost / price per share
Number of shares = $15,530,000 / $21.045 per share
Number of shares = 737,943 shares

Therefore, Phillip's Manufacturing needs to sell 737,943 shares of stock to meet their cash need.

Phillip's Manufacturing Wants to Raise $15 Million to Open a New