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Chapter 5: 18BP_a (page 498)

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

a. How many shares of stock must be sold to net $21,120,000? (Note: No out-of-pocket costs must be considered in this problem.)

Short Answer

Expert verified

The company should sell 500,000 shares to get $21,120,000.

Step by step solution

01

Information provided in the question

Net income = $19,000,000

Shares outstanding = $4,000,000

Present selling price = $48 per share

ROI =13 %

Selling price for public issue = $44 per share

Spread = 4%

02

Calculation of the number of shares to be sold

The company should sell 500,000 shares.

Numberofshares=NetamountrequiredShareprice脳1-Flotationcost=$21,120,000$44脳1-4%=500,000shares

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Most popular questions from this chapter

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:

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