Calculating Costs of Issuing Stock Saddles and Bridles,Inc.,with the help of its investment bank recently issued 3 million shares of new stock.The offer price on the stock was $23.50 per share and Saddles and Bridles received a total of $68.385 million from the stock offering.Calculate the net proceeds and the underwriter's spread charged by the underwriter to Saddles and Bridles.What percentage of the gross proceeds is the investment bank charging Saddles and Bridles for underwriting the stock issue?
A)3 percent
B)6 percent
C)9 percent
D)97 percent

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 $23.50 and the net proceeds are $22.385 million / 3 million shares = $22.795 per share. Therefore, the underwriter's spread is $23.50 - $22.795 = $0.705 per share. The percentage of the gross proceeds that the investment bank is charging Saddles and Bridles for underwriting the stock issue is $0.705 / $23.50 * 100% = 3%.