Renee's Boutique, Inc., needs to raise $25 million to finance firm expansion. In discussions with its investment bank, Renee's Boutique learns that the bankers recommend an offer price of $9 per share and that 5 million shares of stock be sold. If the net proceeds on the stock sale leaves Renee's Boutique with $25 million, calculate the underwriter's spread on the stock issue.

Question

Quizplus · Accepted Answer

The underwriter's spread is the difference between the offer price and the net proceeds per share. In this case, the offer price is $9 per share and the net proceeds are $5 per share ($25 million / 5 million shares). Therefore, the underwriter's spread is $4 per share ($9 - $5).