Question

Happy Giraffe has preferred stock that pays a dividend of $9.00 per share and sells for $100 per share. It is considering issuing new shares of preferred stock. These new shares incur an underwriting (or flotation) cost of 2.10%.

Required:
a. How much will Happy Giraffe pay to the underwriter on a per-share basis?
b. After it pays its underwriter, how much will Happy Giraffe receive from each share of preferred stock that it issues?

Answer 1

Answer:

• a. $2.10
• b. $97.90

Explanation:

a. Underwriter fees per share:

= Selling price of share * Underwriting cost

= 100 * 2.10%

= $2.10

b. Amount received per share:

= Selling price per share - underwriting fees per share

= 100 - 2.10

= $97.90