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Foundations of Financial M
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Problem 15-6 Problem 15-12

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Copyright © 2008 McGraw-Hill/Irwin and Info-Labs. (www.info-labs.com)
t Templates
Financial Management
HAPTER 15

Problem 15-15

Block and Hirt

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Foundations of Financial Management
Block and Hirt - Twelfth Edition

Problem 15-6 Objective

Underwriting spread

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Course Name:
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Assume Fisher Food Products is thinking about three different size offerings for the issuance of addition 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?

Copyright © 2008 McGrawHill/ Irwin Spreadsheet Template by Block and Hirt Problem: 15-6
 Solution
Problem 15-6
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 FORMULA
b. $6,000,000 $40 $37.28 FORMULA
c. $25,000,000 $40 $38.12 FORMULA

What principle does this demonstrate?

Copyright © 2008 McGrawHill/ Irwin Spreadsheet Template by Block and Hirt Problem: 15-6
Foundations of Financial Management
Block and Hirt - Twelfth Edition

Problem 15-12 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?

Copyright © 2008 McGrawHill/ Irwin Spreadsheet Template by Block and Hirt Problem: 15-12
 Solution
Problem 15-12
Instructions
Enter formulas to complete the requirements of this problem.

Assumptions
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 FORMULA

Total expenses as a percentage of total value FORMULA

b. If the firm wanted to net $18 million from this issue, how many shares must be sold? FORMULA

Copyright © 2008 McGrawHill/ Irwin Spreadsheet Template by Block and Hirt Problem: 15-12
Foundations of Financial Management
Block and Hirt - Twelfth Edition

Problem 15-15 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. Use 6 percent semiannually throughout the
analysis. (Disregard taxes.)

Copyright © 2008 McGrawHill/ Irwin Spreadsheet Template by Block and Hirt Problem: 15-15
 Solution
Problem 15-15
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.

Assumptions
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
Out-of-pocket costs
Spread
Net amount to Landers FORMULA FORMULA
Interest payments (semiannual) FORMULA FORMULA
Present value of interest payments FORMULA FORMULA
Present value of maturity value FORMULA FORMULA
Net present value FORMULA FORMULA

Copyright © 2008 McGrawHill/ Irwin Spreadsheet Template by Block and Hirt Problem: 15-15