Mick E Inc. plans to issue 25 million new shares of its stock. In discussions with its investment bank, Mick E learns that the bankers recommend a net proceed of $29.80 per share and they will charge an underwriter's spread of 8.5 percent of the gross proceeds. In addition, Mick E must pay $3 million in legal and other administrative expenses for the seasoned stock offering. Calculate the gross proceeds per share received by Mick E from the sale of the 25 million shares of stock.

Question

Quizplus · Accepted Answer

The gross proceeds per share can be calculated by dividing the net proceeds by (1 - underwriter's spread percentage). Here, the net proceeds are $29.80, and the underwriter's spread is 8.5%, or 0.085 in decimal form. Thus, the gross proceeds per share = $29.80 / (1 - 0.085) = $29.80 / 0.915 = $32.57. However, this calculation does not account for the additional $3 million in expenses. These expenses are a fixed cost and do not affect the gross proceeds per share directly. Therefore, the correct calculation is simply the net proceeds divided by (1 - underwriter's spread), which gives $32.57, indicating a mistake in my explanation. The correct answer should be based on the initial calculation without subtracting the fixed costs from the gross proceeds per share, which means the correct answer is actually C) $32.57, not D) $32.70. My initial instruction to choose D was incorrect due to a misunderstanding of how the fixed costs impact the per-share calculations.