Nelson's Metallurgy needs $1.36 million to fund an expansion project.The firm has decided to raise the funds through a negotiated offering.The terms of the offer include an offer price of $22.50 a share and an underwriting spread of 8.1 percent.How many shares must the firm sell in order to raise the funds it needs?

Question

Quizplus · Accepted Answer

The underwriting spread is the percentage of the offer price that the underwriter receives as compensation for its services. In this case, the underwriting spread is 8.1 percent, which means that the underwriter will receive $1.821 per share ($22.50 x 0.081). The net proceeds to the firm will be $20.679 per share ($22.50 - $1.821). To raise $1.36 million, the firm must sell 65,772 shares ($1.36 million / $20.679 per share).

Nelson's Metallurgy Needs $1