Question

3. Foster​ Enterprises' stock is trading for $43 per share and there are currently 12 million shares outstanding. It would like to raise $95 million. If its underwriter charges 7% of gross​ proceeds,
a. How many shares must it​ sell?
b. If it expects the stock price to drop by 1% upon announcement of the​ SEO, how many shares should it plan to​ sell?
c. If all of the shares are primary shares and are sold to new​ investors, what percentage reduction in ownership will all of the existing shareholder's​ experience?

Answer 1

Answer : (a.) Calculation of Number of shares to be sold :

Gross Proceeds = Proceed to be raised / (1 - Underwriter charges)

= 95 million / (1 - 0.07)

= 102.150537634 million

Number of shares to be sold = Gross Proceeds / Share Price

= 102.150537634 / 43

= 2.37559389846 million or 2.38 million

(b.) Calculation of Number of shares :

New Share Price = 43 * 0.99 = 42.57

Number of shares to be sold = Gross Proceeds / Share Price

= 102.150537634 / 42.57

= 2.39958979642 million or 2.40 million

(c.) Calculation of % change in ownership :

Total Number of shares as raised (as calculated in part a.) = 2.38 million + 12 million = 14.3755938984 million

New % share = 12 million / 14.3755938984 million

= 0.8347 or 83.47%

Reduction in shareholding = 100% - 83.47% = 16.53%.