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Pricing Stock Issues in an IPO Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public. Zang and ESM agree that Zang's current value of equity is $60 million. Zang currently has 3 million shares outstanding and will issue 1.6 million new shares. ESM charges a 9% spread. What is the correctly valued offer price? Do not round intermediate calculations. Round your answer to the nearest cent. $ How much cash will Zang raise net of the spread? Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Do not round intermediate calculations. Round your answer to three decimal places. $ million

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abiolataiwo2015

Answer:

A. $ l19.08

B. $27,780,480

Explanation:

A. Calculation for the correctly valued offer price

Using this formula

Correctly Valued Offer Price = Current Value of Equity/[(Number of new share issued*Spread)+ Number of Outstanding shares)

Let plug in the formula

Correctly Valued Offer Price= 60,000,000/[(1, 600,000*9%)+3,000,000]

Correctly Valued Offer Price=60,000,000/(144,000+3,000,000)

Correctly Valued Offer Price= 60,000,000/3,144,000

Correctly Valued Offer Price= $ 19.08

Therefore the correctly valued offer price will be

$ 19.08

B. Calculation for How much cash will Zang raise net of the spread

Using this formula

Cash Raised net of Spread = Valued offer price(1-spread)*No. of new share issued

Let plug in the formula

Cash Raised net of Spread = 19.08(1-0.09)*1,600,000

Cash Raised net of Spread =(19.08*091)*1,600,000

Cash Raised net of Spread =17.3628*1,600,000

Cash Raised net of Spread =$27,780,480

Therefore Cash Raised net of Spread will be $27,780,480