Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

16BP

Expert-verified
Foundations Of Financial Management
Found in: Page 497
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be $1.64. The growth rate (g) is 8 percent and the discount rate (Ke) is 13 percent.

a. What should be the price of the stock to the public?

b. If there is a 7 percent total underwriting spread on the stock, how much will the issuing corporation receive?

c. If the issuing corporation requires a net price of $31.30 (proceeds to the corporation) and there is a 7 percent underwriting spread, what should be the price of the stock to the public? (Round to two places to the right of the decimal point.)

  1. The stock price to the public is $32.8.
  2. The net amount that the corporation will receive is $30.504.
  3. The stock price to the public is $33.655 when $31.30 is the required net price of the corporation.
See the step by step solution

Step by Step Solution

Computation of stock price to the public

Computation of net amount received by the corporation

Computation of stock price to the public when the required net price is given

Assuming the issue price is $100.

The underwriting spread is 7% (given).

Net received by the corporation is $93, i.e., the difference between the issue price and underwriting spread.

Most popular questions for Business-studies Textbooks

Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

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

c. What return must the corporation earn on the net proceeds to equal the earnings per share before the offering? How does this compare with current return on the total assets on the balance sheet?

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.