Sipe's Paint and Wallpaper, Inc., needs to raise $1.25 million to finance plant expansion. In discussions with its investment bank, Sipe's learns that the bankers recommend a gross price of $37.20 per share and that 48,500 shares of stock be sold. If the net proceeds on the stock sale leaves Sipe's with $1.25 million, calculate the underwriter's spread on the stock issue.

Question

Quizplus · Accepted Answer

The underwriter's spread is the difference between the gross price and the net proceeds per share. In this case, the gross price is $37.20 and the net proceeds are $1.25 million / 48,500 shares = $25.79. Therefore, the underwriter's spread is $37.20 - $25.79 = $11.41.