Sterling, Cooper, Draper, Price would like to go public to raise $40 million to

Question

Sterling, Cooper, Draper, Price would like to go public to raise $40 million to support expected growth. Their investment bank charges the following:

5.9% underwriting spread for a firm commitment

$239,144 in legal fees

The underwriter feels that the IPO will be priced at $24.49 per share. How many shares must be issued to net the company the proceeds it needs to fund its future investment (Hint: The total amount issued must cover the required net proceeds plus all fees and the underwriter's spread)?

Explanation / Answer

Calculation of number of shares to be issued :

Required net fund from the issue $40,000,000

Legal Fees $239144

Share price for issue = $24.49

Underwriting spread =Number of shares * $24.49 *5.9%

Hence:

$40,000,000 = (Number of shares issued * 24.49) – (Number of shares * $24.49 *5.9%) - $239144

$40,000,000 +$239144 = (Number of shares issued * 24.49) – (Number of shares * $24.49 *5.9%)

$40,239,144 = (Number of shares issued * 24.49) – (Number of shares * 1.44491)

$40,239,144 = Number of shares issued * 23.04509

Number of shares issued = $40,239,144 / $23.04509

= 1746105 Shares

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