The Dunning Co Needs To Raise 667 Million To Finance Its Exp ✓ Solved
The Dunning Co Needs To Raise 667 Million To Finance Its Expansi
The Dunning Co. needs to raise $66.7 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $67 per share and the company’s underwriters charge a spread of 8.5 percent. The SEC filing fee and associated administrative expenses of the offering are $467,000. Required: What are the required proceeds from the sale necessary for the company to pay the underwriter's spread and administrative costs? How many shares need to be sold?
The Elkmont Corporation needs to raise $52.2 million to finance its expansion into new markets. The company will sell new shares of equity via general cash offering to raise the needed funds. The offer price is $38 per share and the company’s underwriters charge a spread of 7 percent. The SEC filing fee and associated administrative expenses of the offering are $1,462,000. Required: What are the required proceeds from the sale necessary for the company to pay the underwriter's spread and administrative costs? How many shares need to be sold?
The Collins Co. has just gone public. Under a firm commitment agreement, Collins received $33.40 for each of the 4.24 million shares sold. The initial offering price was $35.80 per share, and the stock rose to $43.80 per share in the first few minutes of trading. Collins paid $919,000 in legal and other direct costs and $278,000 in indirect costs. Required: What is the net amount raised? What are the total direct costs? What are the total indirect costs? What are the total costs? What was the flotation cost as a percentage of funds raised?
Paper For Above Instructions
To address the financing needs of The Dunning Co. for its market expansion, several calculations must be made. First, we determine the total required proceeds from the sale of shares, taking into account the underwriting spread and administrative expenses.
1. Financial Calculations for The Dunning Co.
The Dunning Co. needs to raise $66.7 million. The offer price for the shares is $67, with the underwriters charging a spread of 8.5%. The SEC filing fee and administrative expenses total $467,000. To find the required proceeds, we set up the following calculation:
Let X be the required proceeds. The underwriters take 8.5% of X, which is 0.085X. The total proceeds must equal the funds needed for expansion plus the underwriting fee and administrative costs. Thus:
X - 0.085X - $467,000 = $66,700,000
0.915X = $66,700,000 + $467,000
0.915X = $67,167,000
X ≈ $73,400,000 (rounded to nearest whole number)
Now, to find out how many shares need to be sold, we divide the total required proceeds by the offer price:
Number of shares = $73,400,000 / $67 ≈ 1,095,522 (rounded to nearest whole number).
2. Financial Calculations for The Elkmont Corporation
Next, for the Elkmont Corporation, which needs $52.2 million to fund its expansion:
Again, we will calculate the required proceeds in a similar fashion:
Let Y be the required proceeds. The share offer price is $38, and the underwriting spread is 7% with total administrative costs of $1,462,000. The equation would be:
Y - 0.07Y - $1,462,000 = $52,200,000
0.93Y = $52,200,000 + $1,462,000
0.93Y = $53,662,000
Y ≈ $57,695,698 (rounded to nearest whole number)
To find the number of shares to sell:
Number of shares = $57,695,698 / $38 ≈ 1,518,713 (rounded to nearest whole number).
3. Financial Calculations for The Collins Co.
For The Collins Co., which has gone public, we have a different situation. The company received $33.40 per share for 4.24 million shares sold. Its offering price was $35.80, and total legal and direct costs are $919,000 with indirect costs of $278,000.
The total amount raised can be calculated as:
Amount raised = 4.24 million shares * $33.40/share = $141,736,000.
The direct costs total $919,000, while the indirect costs total $278,000. The total costs add up as:
Total costs = Direct costs + Indirect costs = $919,000 + $278,000 = $1,197,000.
The net amount raised is the amount raised minus the total costs:
Net amount raised = $141,736,000 - $1,197,000 = $140,539,000.
The flotation cost percentage is calculated based on total costs as a percentage of funds raised:
Flotation cost percentage = (Total Costs / Funds Raised) 100 = ($1,197,000 / $141,736,000) 100 ≈ 0.845%
Summary of Results
- The Dunning Co: Required proceeds: $73,400,000; Shares sold: 1,095,522
- The Elkmont Corp: Required proceeds: $57,695,698; Shares sold: 1,518,713
- The Collins Co: Net amount raised: $140,539,000; Total direct costs: $919,000; Total indirect costs: $278,000; Total costs: $1,197,000; Flotation cost percentage: 0.845%
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