Calculating Costs of Issuing Stock Video Games,Inc.,with the help of its investment bank recently issued 10 million shares of new stock.The offer price on the stock was $47.50 per share and Video Games received a total of $446,500,000 through this stock offering.Calculate the net proceeds and the underwriter's spread on the stock offering.What percentage of the gross price is the investment bank charging Video Games for underwriting the stock issue?
A)3 percent
B)30 percent
C)6 percent
D)9 percent

Question

Quizplus · Accepted Answer

The net proceeds are calculated by subtracting the underwriter's spread from the total amount received through the stock offering.

Underwriter's Spread = (Offer Price - Net Price)/Offer Price 
= ($47.50 - $45.00)/$47.50 
= 5.26%

Net proceeds = Total Amount Received - Underwriter's Spread 
= $446,500,000 - ($446,500,000 x 5.26%) 
= $446,500,000 - $23,487,950 
= $423,012,050

Therefore, the investment bank is charging Video Games 5.26% for underwriting the stock issue, which is closest to option C, 6%.