Question

Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public. Zang and ESM agree that Zang's current value of equity is $57 million. Zang currently has 3 million shares outstanding and will issue 2 million new shares. ESM charges a 6% spread.

1. What is the correctly valued offer price? Do not round intermediate calculations. Round your answer to the nearest cent.

2. How much cash will Zang raise net of the spread (use the rounded offer price)? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar.

Answer 1

Given,

Current value of equity = $57 million or $57000000

Shares outstanding = 3 million or 3000000 shares

New shares = 2 million or 2000000

Spread rate = 6%

Solution :-

(a)

Correctly valued offer price = Current value of equity/[(new shares x spread rate) + shares outstanding]

= $57000000/[(2000000 shares x 6%) + 3000000 shares]

= $57000000/[120000 shares + 3000000 shares]

= $57000000/3120000 shares = $18.269230769 or $18.27

(b)

Cash raised net of spread = Correctly valued offer price x (1 - spread rate) x New shares

= $18.27 x (1 - 0.06) x 2000000 shares

= $18.27 x 0.94 x 2000000 shares = $34347600