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 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. What percentage of the gross proceeds is the investment bank charging Saddles for underwriting the stock issue?
A) 3%
B) 6%
C) 9%
D) 97%

Question

Quizplus · Accepted Answer

The underwriter's spread is the difference between the offer price and the net proceeds. The net proceeds are the total amount of money that Saddles received from the stock offering, which is $68.385 million. The offer price is $23.50 per share, and Saddles issued 3 million shares, so the gross proceeds are $70.5 million. The underwriter's spread is $70.5 million - $68.385 million = $2.115 million. The underwriter's spread as a percentage of the gross proceeds is $2.115 million / $70.5 million = 3%.