For every question, please write down each main step before you obtain the final

Question

For every question, please write down each main step before you obtain the final answer. Correct final answer with incorrect related work (calculation) or without any work may receive 0 point. On the contrary, incorrect final answer with correct related work (calculation) will receive partial credits.

Question 2 – Underwriting and Flotation Expenses [4 points]: The Taussig Company, whose stock price is currently $28, needs to raise $20 million by issuing common stock. Underwriters have informed Taussig’s management that it must price the new issue to the public at $27.53 per share to ensure that all shares will be sold. The underwriters’ compensation will be 7 percent of the issue price. The company will also incur expenses in the amount of $480,000. How many shares must Taussig sell to net $20 million after underwriting and flotation expenses?

Explanation / Answer

THE UNDERWRITERS WILL CHARGE 7% OF ISSUE PRICE

SO THE NEW SHARES SHOULD BE ISSUED AT PRICE = 27.53 - 7%(27.53) = $25.60

NOW ISSUE INVOLVES FLOTATION COST OF $480000

SO TOTAL AMOUNT TO BE RAISED = $20 MILLION + FLOTATION COST

TOTAL AMOUNT TO BE RAISED = $20,000,000 + $480,000 = $20,480,000

NO OF SHARES TO BE ISSUED = $20,480,000/25.60 = 800000 SHARES ANSWER

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