Question

The Wrigley Corporation needs to raise \(44 million. The investment banking firm of Tinkers, Evers & Chance will handle the transaction.

1. If stock is utilized, 2,300,000 shares will be sold to the public at \)20.50 per share. The corporation will receive a net price of \(19 per share. What is the percentage underwriting spread per share?
2. If bonds are utilized, slightly over 43,700 bonds will be sold to the public at \)1,009 per bond. The corporation will receive a net price of $994 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price.)
3. Which alternative has the larger percentage of spread? Is this the normal relationship between the two types of issues?

Short answer

a. Percentage spread when stock is utilized is 7.317%

b. Percentage spread when bonds are utilized is 1.486%

c. Yes, the relationship between the two types of issues is normal.

Step-by-step solution

Computation of percentage underwriting spread if stock is utilized

$$\begin{gathered} Percentagespread=\frac{Publicprice-Nettocorporation}{Publicprice}\times 100 \\ =\frac{\$20.50-\$19}{\$20.50}\times 100 \\ =\frac{\$1.50}{\$20.50}\times 100 \\ =7.317\% \end{gathered}$$

Computation of percentage underwriting spread if bonds are utilized

$$\begin{gathered} Percentagespread=\frac{Publicprice-Nettocorporation}{Publicprice}\times 100 \\ =\frac{\$1,009-\$994}{\$1,009}\times 100 \\ =\frac{\$15}{\$1,009}\times 100 \\ =1.486\% \end{gathered}$$

Conclusion

The stock has a larger percentage spread.

Also, the relationship between these two types of issues is normal because the market withstock offerings contains uncertainty. Hence, the investment bankers require appropriate compensation.