Question

Luther Industries sold 10 million shares of stock in a seasoned equity offering. The market price of Luther at the time was $25 per share. Of the 10 million shares sold, 6 million shares were primary shares being sold by the company, and the remaining 4 million shares were being sold by venture capitalists. Luther's underwriters charges 5% of the total funds raised as an underwriting fee. (a) How much money did Luther Industries company raise? (4 pts.) (b) How much money did the venture capitalists receive? (4 pts.)(8 Points)

Answer 1

a) Computation of Total funds raised by Luther industries

No.of Sharse sold =6 Million Share

Market Price per Share = $ 25

Gross proceeds Received = No.of Shares * Market Price per Share

= 6 Million Share * 25

= $150 Millions

Underwriter fees = 150 Million Shares * 5%

= $ 7.5 Millions

Net Proceeds = Gross Proceeds - Underwriter commision

= $ 150 Millions - $ 7.5 Millions

= $ 142.5 Millions

Hence net proceeds raised by the Company $ 142.5 Millions

b) Calculation of Amount received by the Venture Capitalists

Gross Proceeds raised by the Venture Capitalists = No.of shares* Market Price per share

= 4 million * $ 25

= $ 100 Millions

Underwriter fees = Gross proceeds * 5%

= $ 100 Millions * 5%

= $ 5 Million

Net Proceeds = Gross Proceeds - Underwriter commision

= $ 100 Millions - $ 5 Millions

= $ 95 Milions

Venture capitalists receive $ 95 Millions

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