Question

Young Corporation stock currently sells for $40 per share. There are 1 million shares currently outstanding. The company announces plans to raise $5 million by offering shares to the public at a price of $40 per share.

Q: If the under writing spread is 6% and the other administrative costs are $60,000, what is the dollar value of the total direct costs of the issue? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Answer 1

Compute the number of shares issued, using the equation as shown below:

Shares issued = Required funds/ {Stock price*(1 – Spread)}

                       = $5,000,000/ {$40*(1 – 0.06)

                       = $5,000,000/ $37.60

                       = 132,978.723404 shares

Hence, the number of shares issued is 132,978.723404 shares.

Compute the total direct cost of issue, using the equation as shown below:

Direct cost = (Shares issued*Share price) – Funds required + Other cost

                  = (132,978.723404*$40) – $5,000,000 + $60,000

                  = $5,319,148.93616 – $5,000,000 + $60,000

                  = $379,148.93616

Hence, the total direct cost of issues is $379,149.