The Wrigley corporation needs to raise $30 million. The investment banking firm

Question

The Wrigley corporation needs to raise $30 million. The investment banking firm will handle the transaction. a) if stock is utilized, 2,000,000 shares will be sold to public at $15.70 per share. The corporation will receive a net price of $15 per share. What is the percentage underwriting spread per share? b)if bonds are utilized, slightly over 30,000 bonds will be sold to the public at $1,001 per bond. The corporation will receive a net price of $992 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price). c) which alternative has the larger percentage of spread? Is this the normal relationship between two types of issues? show work

Explanation / Answer

a. Spread = $15.70 -$15.00 = $0.70 %

underwriting spread = $.70$15.70 = 4.46%

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b. Spread = $1,001 -$992 = $9 %

underwriting spread = $9/$1,001 = .899%

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c. The stock alternative has the larger percentage spread.

This is normal because there is more uncertainty in the market associated with a stock offering and investment bankers want to be appropriately compensated.

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