Question

INPUT DATA: KEY OUTPUT: Amount needed by the firm: $170,000 Issue amount ($): $200,000 Flotation costs (in decimal form): 10.00% # of shares: 8,000 Other issuing expenses: $10,000 Stock price per share: $25.00 Underwriting fees $20,000 Other expenses $10,000 Total issuing costs $30,000 Amt of usable funds $170,000

Diction Publishing estimates that it needs $500,000 to support its expected growth. The underwriting fees charged by the investment banking firm for which you work are 6.5% for such issue sizes. In addition, it is estimated that Diction will incur $4,900 in other expenses related to the IPO. c. Suppose that Diction’s investment banker charges 8.2% rather than 6.5%. Assuming that all other information given earlier is the same, how many shares must Diction issue in this situation to net the company the $500,000 it needs? d. Suppose everything is the same as originally presented, except Diction will incur $5,835 in other expenses rather than $4,900. In this situation, how many shares must Diction issue to net the company the $500,000 it needs?

Answer 1

Total Issue Size = Amount of financing required + Floation costs

Floatation costs = Underwriting fees + Other expenses

Number of shares to be issued = Total Issue Size / Issue price per stock

C) With undewriting fees of 8.2%

Underwriting fees = 8.2% * Issue size

Other expenses = 4900

Total Issue Size = Amount of Financing Required + 8.2% (Total Issue size) + 4900

Total Issue Size - 8.2% * Total Issue Size = 500,000 + 4900

(1-8.2%) * total Issue Size = 504,900

Total Issue Size =4900 / (1-8.2%) = 504,900 / 0.918 = 550,000

Total Issue size = $550,000

Stock price per share = $25

So, Number of shares to be issued = 550,000/25 = 22,000

The answer for c) is 22,000

D) If other expenses is 5835

Total Issue Size = Amount of financing required + Underwrting fees + Other expenses

Total Issue size = 500,000 + 6.5% * (Total Issue Size) + 5835

(1-6.5%) * Total Issue Size = 500000 + 5835

Total Issue Size = 505,835 / (1-6.5%) = $ 541,000

Total number of shares to be issued = 541,000 / 25 = 21,640

The answer for d) is 21,640