Question

Nielson Motors sold 10 million shares of stock in an SEO. The market price of Nielson's stock at the time was $37.50. Of the 10 million shares sold, 4 million shares were primary shares sold by the company, and the remaining 6 million shares were being sold by the venture capital investors. The costs of the issue, comprising of administrative fees of $50,000, and an underwriter spread of 4% of the gross proceeds, are shared proportionately between the primary and secondary shares.

a. Calculate the net funds raised by i) Nielson Motors and ii) the venture capitalist

b. Calculate the amount of money the underwriter will earn on this transaction

c. Briefly explain the difference in issuance costs between a SEO and an IPO

Answer 1

IF ANY QUERY, FEEL FREE TO ASK Solution a fund raised by i) Nielson Motors Particulars Fund Raised = 4000000 x 37.50 Less: Underwriter charges = Fund raised x spread Less: Proportionate Admin. Fees = 50000 x 4/10 Fund Raised Amount 150000000 6000000 20000 $143,980,000.00 ii) Venture Capitalist Particulars Fund Raised = 6000000 x 37.50 Less: Underwriter charges = Fund raised x spread Less: Proportionate Admin. Fees = 50000 x 6/10 Fund Raised Amount 225000000 9000000 30000 $215,970,000.00 b Earning of underwriter Earning = No. of share x price x spread 10000000 x 37.5 x 4% $15,000,000.00 100 SEO means seasoned Equity offering where share of the company are already listed, available to public and traded on stock exchange whereas IPO means initial public offering where share are for first time made available to public.