Question

Electric Motors, Inc., is going public next month to raise the funds needed to finance the company’s future growth. The company estimates that it needs $45 million to support its expected growth. The underwriting fees charged by the selected investment banking firm are based on the schedule provided in the following table:

	Bonds		Equity
Issue Size ($ million)	Straight	Convertible	Seasoned Issues	IPOs
Under 10.0	4.4%	8.8%	13.3%	17.0%
10.0 – 19.9	2.8%	8.7%	8.7%	11.6%
20.0 – 39.9	2.4%	6.1%	6.9%	9.7%
40.0 – 59.9	1.3%	4.3%	5.9%	8.7%
60.0 – 79.9	2.3%	3.2%	5.2%	8.2%
80.0 – 99.9	2.2%	3.0%	4.7%	7.9%
100.0 – 199.9	2.3%	2.8%	4.2%	7.1%
200.0 – 499.9	2.2%	2.2%	3.5%	6.5%
500 and larger	1.6%	2.1%	3.2%	5.7%

In addition, it is estimated that Electric Motors, Inc. will incur $350,000 in other expenses related to the IPO. If Electric Motors, Inc.’s stock can be sold for $30.40 per share, how many shares must be issued to net the company the $45 million needed? Show your work.

Answer 1

The underwriting fee to be charged is 8.7%, since the issue is of equity shares, and it is an IPO, and the issue size is in the range of $40.0 - $59.9 million.

Net proceeds to company = (number of shares issued * issue price per share * (1 - underwriting fee)) - other expenses

$45,000,000 = (number of shares issued * $30.40 * (1 - 8.7%)) - $350,000

number of shares issued = ($45,000,000 + $350,000) / ($30.40 * (1 - 8.7%))

number of shares issued = 1,633,926