Financial experts have determined that Express Courier needs $141 million to sup

Question

Financial experts have determined that Express Courier needs $141 million to support growth next year. After consulting with its investment banker, Express Courier has determined that the costs to issue new stock to raise the needed funds will total 6% of the issue price- that is, flotation costs will be 6%. If Express Courier can issue stock at its current market price, which is $80 per share, how many shares of common stock must the company issue so that it has $141 million after flotation costs to use for its planned growth. Based on your answer, show how much of the total dollar amount that will be issued consists of flotation costs and how much Express Courier will recieve after the investment banker is paid the flotation costs.

Explanation / Answer

If the company issues 1 share at $80, the flotation cost is 6%.
Thus, net cash received per share = (1-0.06)*80 = $75.2

The total amount to be raised is $141M.
Hence, no. of shares issued = Total Amt./Net Cash per Share
= 141000000/75.2
= 1875000

Hence, 1,875,000 (or 1.875M) shares needs to be issued.

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