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LG1 18-7 Calculating Fees on a Loan Commitment You have approached your local bank for a start-up
loan commitment for $250,000 needed to open a computer repair store. You have requested that the
term of the loan be one year. Your bank has offered you the following terms: size of loan commitment
= $250,000, term = one year, up-front fee = 50 basis points, back-end fee = 75 basis points, and rate
on the loan = 8 percent. If you immediately take down $150,000 and no more during the year,
calculate the total interest and fees you will pay on this loan commitment.
LG1 18-8 Calculating Fees on a Loan Commitment Casey’s One Stop has been approved for a $127,500
loan commitment from its local bank. The bank has offered the following terms: term = one year, up-
front fee = 85 basis points, back-end fee = 35 basis points, and rate on the loan = 7.75 percent.
Casey’s expects to immediately take down $119,000 and no more during the year unless there is
some unforeseen need. Calculate the total interest and fees Casey’s One Stop can expect to pay on
this loan commitment.
LG4 18-9 Calculating Costs of Issuing Debt DiPitro’s Paint and Wallpaper, Inc. needs to raise $1
million to finance plant expansion. In discussions with its investment bank, DiPitro’s learns that the
bankers recommend a debt issue with gross proceeds of $1,000 per bond and they will charge an
underwriter’s spread of 6.5 percent of the gross proceeds. How many bonds will DiPitro’s Paint and
Wallpaper need to sell in order to receive the $1 million they need?
LG4 18-10 Calculating Costs of Issuing Debt Renee’s Boutique, Inc. needs to raise $58 million to
finance firm expansion. In discussions with its investment bank, Renee’s learns that the bankers
recommend a debt issue with an offer price of $1,000 per bond and they will charge an underwriter’s
spread of 5 percent of the gross price. Calculate the net proceeds to Renee’s from the sale of the debt.
How many bonds will Renee’s Boutique need to sell in order to receive the $58 million they need?
LG4 18-11 Calculating Costs of Issuing Stock The Fitness Studio, Inc., with the help
of its investment bank, recently issued 2.5 million shares of new stock. The offer price on the stock
was $20.50 per share and The Fitness Studio received a total of $48,687,500 through this stock
offering. Calculate the net proceeds and the underwriter’s spread on the stock offering. What
percentage of the gross price is the investment bank charging The Fitness Studio for underwriting the
stock issue?
LG4 18-12 Calculating Costs of Issuing Stock Harper’s Dog Pens, Inc., with the help of its investment
bank, recently issued 8.5 million shares of new stock. The offer price on the stock was $12.00 per
share and Harper’s received a total of $97.75 million from the stock offering. Calculate the net
proceeds and the underwriter’s spread charged by the underwriter to Harper’s Dog Pens, Inc. What
percentage of the gross proceeds is the investment bank charging Harper’s Dog Pens for underwriting
the stock issue?
LG4 18-13 Calculating Costs of Issuing Stock Zimba Technology Corp. recently went public with an
initial public offering of 2.5 million shares of stock. The underwriter used a firm commitment
offering in which the net proceeds was $8.05 per share and the underwriter’s spread was 8 percent of
the gross proceeds. Zimba also paid legal and other administrative costs of $250,000 for the IPO.
Calculate the gross proceeds and the total funds received by Zimba from the sale of the 2.5 million
shares of stock.
LG4 18-14 Calculating Costs of Issuing Stock Howett Pockett, Inc. plans to issue 10 million new shares
of its stock. In discussions with its investment bank, Howett Pocket learns that the bankers
recommend a net proceed of $33.80 per share and they will charge an underwriter’s spread of 5.5
percent of the gross proceeds. In addition, Howett Pockett must pay $3.4 million in legal and other
administrative expenses for the seasoned stock offering. Calculate the gross proceeds and the total
funds received by Howett Pockett from the sale of the 10 million shares of stock.
Total funds received by Howett Pockett = (10m shares × $33.80 per share) – $3.4m = $334.6m
advanced
problems
LG1 18-15 Calculating Fees on a Loan Commitment During the last year, you have had a loan
commitment from your bank to fund inventory purchases for your small business. The total line
available was $500,000, of which you took down $400,000. It is now the end of the loan commitment
period and your bank had you pay the back-end fees. You have misplaced the paperwork that listed
the terms of the commitment, but you know you paid total fees (this does not include any interest
paid to borrow the $400,000) of $3,250 on this loan commitment. You remember that the up-front fee
was 50 basis points. Calculate the back-end fee on this loan commitment.
LG1 18-16 Calculating Fees on a Loan Commitment During the last year, you have had a loan
commitment from your bank to fund working capital for your business. The total line available was
$17 million, of which you took down $13 million. It is now the end of the loan commitment period
and your bank had you pay the back-end fees. You have misplaced the paperwork that listed the terms
of the commitment, but you know you paid total fees (this does not include any interest paid to
borrow the $13 million) of $72,500 on this loan commitment. You remember that the back-end fee
was 75 basis points. Calculate the up-front fee on this loan commitment.
LG4 18-17 Calculating Costs of Issuing Stock DiPitro’s Paint and Wallpaper, Inc. needs to raise $1
million to finance plant expansion. In discussions with its investment bank, DiPitro’s learns that the
bankers recommend a gross price of $25 per share and that 45,000 shares of stock be sold. If the net
proceeds on the stock sale leaves DiPitro’s with $1 million, calculate the underwriter’s spread on the
stock issue.
LG4 18-18 Calculating Costs of Issuing Stock Renee’s Boutique, Inc. needs to raise $58 million to
finance firm expansion. In discussions with its investment bank, Renee’s learns that the bankers
recommend an offer price of $33.75 per share and that 1.8 million shares of stock be sold. If the net
proceeds on the stock sale leaves Renee’s with $58 million, calculate the underwriter’s spread on the
stock issue.
LG4 18-19 Calculating Costs of Issuing Stock Hughes Technology Corp. recently went public with an
initial public offering in which they received a total of $60 million in new capital funding. The
underwriter used a firm commitment offering in which the offer price was $10 and the underwriter’s
spread was $0.75. Hughes also paid legal and other administrative costs of $1,050,000 for the IPO.
Calculate the number of shares issued through this IPO.
LG4 18-20 Calculating Costs of Issuing Stock Howett Pockett, Inc. needs to raise $12 million in new
capital funding from a seasoned equity offering. In discussions with its investment bank, Howett
Pocket learns that the bankers recommend a gross price of $13.50 per share and they will charge an
underwriter’s spread of $1.00 per share. In addition, Howett Pockett must pay $500,000 in legal and
other administrative expenses for the seasoned stock offering. Calculate the number of shares of stock
that Howett Pockett will need to sell to raise the $12 million.
research it!
Underwriters
Go to the Thomson Financial—Investment Banking and Capital Markets Group website at
http://dmi.thomsonreuters.com/DealsIntelligence / and find the latest information available for
debt and equity securities underwriting. Click on “QUARTERLY REVIEWS.” Under “Select
Category,” select “Debt and Equity.” Click on the latest quarter’s “Global Equity Capital
Markets.” This will download a file onto your computer that will contain the most recent
information on top underwriters for equity securities. Go back and repeat the last step, clicking
on “Global Debt Capital Markets.” What is the most recent dollar value of global debt and equity
underwritten by investment banks? Who are the top underwriters of debt and equity? How have
the top writers’ market shares changed in the last year?
integrated mini-case: Capital Funding in a Public Firm
Nuran Security Systems, Inc. needs to raise $150 million for asset expansion. As it raises the capital
funding, Nuran wants to maintain its current debt ratio of 60 percent. Nuran has been approved for a
loan commitment from its local bank. The bank has offered the following terms: term = one year, up-
front fee = 60 basis points, back-end fee = 90 basis points. Nuran expects it will take down 90 percent
of the loan commitment.
Nuran’s will also issue new shares of stock to support this asset growth. Nuran’s investment bank
will use a firm commitment offering in which the net proceeds are $23.875 per share and the
underwriter’s spread is 7 percent of the gross proceeds. Nuran Security Systems will also pay
legal and other administrative costs of $750,000 for the stock issue.
Calculate the amount of debt and equity funding Nuran Security Systems will need to keep its current
debt ratio constant and the number of shares of stock the firm must issue to raise the needed funds.
What can Nuran Security Systems, Inc. expect to pay for fees on this loan commitment and stock
issue?
SOLUTION:
