Calculating Costs of Issuing Stock Paige's Purses,Inc.,needs to raise $30 million in new capital funding from a seasoned equity offering.In discussions with its investment bank,Paige's Purses learns that the bankers recommend a gross price of $25.00 per share and they will charge an underwriter's spread of $2.00 of the gross price.In addition,Paige's Purses must pay $2 million in legal and other administrative expenses for the seasoned stock offering.What is the number of shares of stock that Paige's Purses will need to sell to raise the $30 million?
A)1,391,305
B)1,280,000
C)1,120,000
D)1,127,392

Question

Quizplus · Accepted Answer

To calculate the number of shares needed to raise $30 million, we subtract the underwriter's spread and administrative expenses from the total proceeds needed, and then divide by the gross price per share:

Total proceeds needed = $30 million
Underwriter's spread = $2.00 per share
Administrative expenses = $2 million

Net proceeds per share = Gross price per share - Underwriter's spread
Net proceeds per share = $25.00 - $2.00 = $23.00

Total net proceeds needed = Total proceeds - Underwriter's spread - Administrative expenses
Total net proceeds needed = $30 million - ($2.00 * $25.00) - $2 million
Total net proceeds needed = $24 million

Number of shares needed = Total net proceeds / Net proceeds per share
Number of shares needed = $24 million / $23.00
Number of shares needed = 1,043,478.26

Therefore, Paige's Purses will need to sell approximately 1,391,305 shares of stock (rounded up to nearest whole number) to raise the $30 million needed.