Answer to Question #15269 in Finance for Debra anderson

Question

D. Butler Inc. needs to raise $14 million. Assuming that the market price of the firm's stock is $95, and flotation costs are 10% of the market price, how many shares would have to be issued? What is the dollar size of the issue?

Answer 1

Stock price is $95, so the flotation Costs are $9.50 (10% x $95)
the firm receives $95 - 9.50 = $85.50 per share
Therefore, to raise $14 million, the firm should issue $14,000,000 / $85.50 = 163,743 shares.
The dollar size of the issue = $95 x 163,743 = $15,555,585

Flotation cost is the cost that D. Butler would incur when ever it makes any offering of
stocks or bonds. The flotation cost includes the cost of printing the formal
documents used to record facts, pay the fees from the government, and other cost
that is needed to run D. Butler Inc. The dollar size depending on the outcome
will determine if the odds are high or low. To raise 14 million, D Butler Inc.
can either size the issue by shares or by dollar amounts. To solve for the
number of shares for the issue:

Divide the amount of money the company needs to raise 14,000,000 by the net price of
the stock 85.50 (the price of the stock - 10 percent flotation costs) which
equals 163,743 shares.

To solve for the dollar amount of the issue:

Multiply the number of shares 163,743 times the market price 95.50 for a total dollar
amount of $15,555,556.