Calculating Costs of Issuing Stock Beach Stuff,Inc.,needs to raise $10 million in new capital funding from a seasoned equity offering.In discussions with its investment bank,Beach Stuff learns that the bankers recommend a gross price of $20.00 per share and they will charge an underwriter's spread of $1.75 of the gross price.In addition,Beach Stuff must pay $1.5 million in legal and other administrative expenses for the seasoned stock offering.What is the number of shares of stock that Beach Stuff will need to sell to raise the $10 million?
A)630,137
B)575,000
C)500,000
D)547,946

Question

Quizplus · Accepted Answer

The number of shares of stock that Beach Stuff will need to sell to raise the $10 million is calculated as follows:Net proceeds = $10 millionGross proceeds = Net proceeds / (1 - Underwriter's spread)Gross proceeds = $10 million / (1 - 0.0875)Gross proceeds = $11.01 millionNumber of shares = Gross proceeds / Gross price per shareNumber of shares = $11.01 million / $20.00Number of shares = 550,500 sharesTherefore, Beach Stuff will need to sell 550,500 shares of stock to raise the $10 million.