Don's Captain Morgan, Inc., needs to raise $25.5 million to finance plant expansion. In discussions with its investment bank, Don's learns that the bankers recommend an offer price (or gross proceeds) of $19 per share and Don's will receive $14.50 per share. Calculate the underwriter's spread on the issue. How many shares of stock will Don's need to sell in order to receive the $25.5 million they need?

Question

Quizplus · Accepted Answer

The underwriter's spread is the difference between the offer price and the net proceeds to the issuer. In this case, the offer price is $19 per share and the net proceeds to the issuer are $14.50 per share. Therefore, the underwriter's spread is $4.50 per share. To calculate the number of shares that Don's needs to sell, we divide the amount of money that they need to raise ($25.5 million) by the net proceeds per share ($14.50). This gives us 1,758,621 shares.