ABC Logistics
The managers of ABC Logistics (ABC) have decided to expand the company's operations into a few new markets. To fund this opportunity, ABC has decided to launch a seasoned equity offering to raise new equity capital. ABC currently has 12 million shares outstanding, and yesterday's closing market price was $40.00 per ABC share. The company plans to sell 3 million newly issued shares in its seasoned offering. The investment banking firm of Armstrong Incorporated has agreed to underwrite the new stock issue for a 4 percent discount from the offering price, which ABC and Armstrong have agreed should be $0.50 per share lower than ABC's closing price the day before the offering is sold.
-If ABC's stock price closes at $39.00 the day before the offering,calculate the total cost of the seasoned equity offering to ABC's existing stockholders as a percentage of the offering proceeds.

Question

Quizplus · Accepted Answer

Proceeds from offer = 3*.96*$38.50=$110.88
market value of firm's shares after offering = 15*38.50 =$577.50
Wealth loss for existing holders = 12 * $1.50 = $18
Underwriting fee = .04*3*$38.50 = $4.62
Wealth loss + underwriting fee = $22.62
Cost of issue = $22.62/$110.88 = 20.40%

ABC Logistics The Managers of ABC Logistics (ABC) Have Decided to Expand