Chapter 5: Q14BP (page 497)

Winston Sporting Goods is considering a public offering of common stock. Its investment banker has informed the company that the retail price will be $16.85 per share for 550,000 shares. The company will receive $15.40 per share and will incur $180,000 in registration, accounting, and printing fees.
What is the spread on this issue in percentage terms? What are the total expenses of the issue as a percentage of total value (at retail)?
If the firm wanted to net $15.99 million from the issue, how many shares must be sold?

Short Answer

Expert verified

Percentage spread is 8.605%, and total expenses are $977,500.
Number of shares that must be sold is 1,050,000.

Step by step solution

Computation of percentage spread

$\begin{array}{rcl} Percentage spread & = & \frac{(Retail price - Net to corporation)}{Retail price} \times 100 \\ = & \frac{($ 16.85 - $ 15.40)}{$ 16.85} \times 100 \\ = & \frac{$ 1.45}{$ 16.85} \times 100 \\ = & 8.605 % \end{array}$

Computation of total expenses

$\begin{array}{rcl} Total expenses & = & (Number of shares \times Spread cost) + Additional expenses \\ = & (550, 000 \times 1.45) + $ 180, 000 \\ = & $ 797, 500 + $ 180, 000 \\ = & $ 977, 500 \end{array}$

Expenses computation as a percentage of the total value

$\begin{array}{rcl} Total value & = & Retail price \times Number of shares \\ = & $ 16.85 \times 550, 000 \\ = & $ 9, 267, 500 \end{array}$

$\begin{array}{rcl} Percentage value & = & \frac{Total Expenses}{Total value} \times 100 \\ = & \frac{$ 977, 500}{$ 9, 267, 500} \times 100 \\ = & 10.547 % \end{array}$

Computation of number of shares to be sold

$\begin{array}{rcl} Number of shares to be sold & = & \frac{(Desired income + Additional cost)}{Net to corporation} \\ = & \frac{($ 15, 990, 000 + $ 180, 000)}{$ 15.40} \\ = & \frac{$ 16, 170, 000}{$ 15.40} \\ = & 1, 050, 000 \end{array}$

Hence, the company requires to sell 1,050,000 shares to earn desired net income

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Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder’s equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder’s equity	\)15,680,000
Total liabilities and stockholder’s equity	\(28,650,000

Short Answer

Step by step solution

Computation of percentage spread

Computation of total expenses

Expenses computation as a percentage of the total value

Computation of number of shares to be sold

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