Sipe's Paint and Wallpaper, Inc., needs to raise $1.05 million to finance plant expansion. In discussions with its investment bank, Sipe's learns that the bankers recommend a gross price of $22 per share and that 50,000 shares of stock be sold. If the net proceeds on the stock sale leave Sipe's with $1.05 million, what percent of the stock price does the underwriter's spread represent?

Question

Quizplus · Accepted Answer

The total amount of money raised through the stock sale is:

50,000 shares x $22 per share = $1.1 million gross price

If the net proceeds to Sipe’s are $1.05 million, then the underwriter’s spread is:

$1.1 million - $1.05 million = $50,000

The percentage that the underwriter's spread represents of the stock price is:

($50,000 / $1.1 million) x 100% = 4.55%

Therefore, the correct answer is B.