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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)


Cost of goods sold


Gross profit


Selling and administrative expenses


Operating profit


Interest expense


Net income before taxes




Net income


Bailey corporation

Balance sheet

As of December 31, 20X1


Current assets:



Marketable securities


Accounts receivables




Total current assets


Net plant and equipment


Total assets


Liabilities and stockholders’ equity

Current liabilities:

Accounts payable


Notes payable


Total current liabilities


Long-term liabilities


Total liabilities


Stockholder’s equity:

Common stock (1,800,000 shares at $1 par)


Capital in excess of par


Retained earnings


Total stockholder’s equity


Total liabilities and stockholder’s equity


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?


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