Present Tense Tonic wants to raise $13 million to purchase equipment by issuing new securities.Management estimates the issue will cost the firm $875,500 for accounting, legal, and other costs.The underwriting spread is 6.5 percent and the issue price is $24 per share.How many shares of stock must be sold if the firm is to have sufficient funds remaining after costs to purchase all of the desired equipment?

Question

Quizplus · Accepted Answer

Total cost of issuing new securities = $13,000,000 + $875,500 = $13,875,500
Underwriting spread = 6.5% of the issue price = 0.065 x $24 = $1.56
Net proceeds per share = issue price - underwriting spread = $24 - $1.56 = $22.44
Number of shares needed to raise $13,875,500 at a net proceeds of $22.44 per share = $13,875,500 / $22.44 = 618,338 shares. Therefore, the best choice is C).

Present Tense Tonic Wants to Raise $13 Million to Purchase