Problem 15-8 Problem 15-14 Problem 15-17
Spreadsheet Templates by Block, Hirt and Danielsen
Copyright © 2011 McGraw-Hill/Irwin and ANSR Source India Pvt Ltd. (www.ansrsourceindia.com)
Spreadsheet Templates
Foundations of Financial Management
MAIN MENU – CHAPTER 15
Investment Banking
Problem 15-8
Objective: Underwriting spread
Student Name:
Course Name:
Student ID:
Course Number:
Assume Fisher Food Products is thinking about three different size offerings for the issuance of additional shares.
Size of Offer Public Price Net to Corporation
a. $ 1.6 million $40 $36.70
b. $ 6.0 million $40 $37.28
c. $ 25.0 million $40 $38.12
What is the percentage underwriting spread for each size offer? What principle does this demonstrate?
Foundations of Financial Management
Block, Hirt and Danielsen
Problem 15-8
Instructions
Enter formulas to calculate the percentage underwriting spread.
Percentage
Net to Underwriting
Size of Offer Public Price Corporation Spread
a. $1,600,000 $40 $36.70 8.25%
b. $6,000,000 $40 $37.28 6.80%
c. $25,000,000 $40 $38.12 4.70%
What principle does this demonstrate?
The principle demonstrated is the larger the offer size, the lower the percentage spread.
Solution
Fisher Food Products
Problem 15-14
Objective: Underwriting costs
Student Name:
Course Name:
Student ID:
Course Number:
Winston Sporting Goods is considering a public offering of common stock. Its investment banker has informed
the company that the retail price will be $18 per share for 600,000 shares. The company will receive $16.50
per share and will incur $150,000 in registration, accounting, and printing fees.
a. What is the spread on this issue in percentage terms? What are the total expenses of the issue as a
percentage of total value (at retail)?
b. If the firm wanted to net $18 million from this issue, how many shares must be sold?
Block, Hirt and Danielsen
Foundations of Financial Management
Problem 15-14
Instructions
Enter formulas to complete the requirements of this problem.
Information provided:
Retail price per share $18
Number of shares 600,000
Net price per share $16.50
Registration, accounting, and printing fees $150,000
a. What is the spread on this issue in percentage terms? What are the total expenses of the issue as a
percentage of total value (at retail)?
Percentage spread 8.33%
Total expenses as a percentage of total value 9.72%
b. If the firm wanted to net $18 million from this issue, how many shares must be sold? 1,100,000
Solution
Problem 15-17
Objective: Comparison of private and public debt offering
Student Name:
Course Name:
Student ID:
Course Number:
The Landers Corporation needs to raise $1 million of debt on a 25-year issue. If it places the bonds privately, the
interest rate will be 11 percent. Thirty thousand dollars in out-of-pocket costs will be incurred. For a public issue,
the interest rate will be 10 percent, and the underwriting spread will be 4 percent. There will be $100,000 in
out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the
full 25-year period, at which time it will be repaid.
Which plan offers the higher net present value? For each plan, compare the net amount of funds initially
available—inflow—to the present value of future payments of interest and principal to determine net present
value. Assume the stated discount rate is 12 percent annually, but use 6 percent semiannually throughout the
analysis. (Disregard taxes.)
Block, Hirt and Danielsen
Foundations of Financial Management
Problem 15-17
Instructions
Enter formulas and functions to complete the requirements of this problem. To compute present values
(i.e., present value of interest payments) use the MS Excel PV function.
Information provided:
Debt $1,000,000
Years 25
Interest rate (private placement)11%
Out-of-pocket costs (private placement)$30,000
Interest rate (public placement)10%
Underwriting spread 4%
Out-of-pocket costs (public placement)$100,000
Stated discount rate 12%
Private Public
Debt issue $1,000,000 $1,000,000
Out-of-pocket costs (30,000) (100,000)
Spread — (40,000)
Net amount to Landers 970,000 860,000
Interest payments (semiannual) 55,000 50,000
Present value of interest payments 866,902 788,093
Present value of maturity value 54,288 54,288
Net present value 48,809 17,619
Solution