Question

Trump Card Co. will issue stock at a retail (public) price of \(32. The company will receive \)29.20 per share.

a. What is the spread on the issue in the percentage terms?

b. If the firm demands receiving a new price only $2.20 below the public price suggested in part a, what will the spread be in percentage terms?

c. To hold the spread down to 2.5 percent based on the public price in part a, what net amount should Trump Card Co. receive?

Short answer

a. Percentage spread on the issue of stock is 8.75%.

b. New percentage spread is 6.875%

c. Net amount that should be received by the company is $31.20.

Step-by-step solution

Computation of spread percentage

$$\begin{gathered} Percentagespread=\frac{Retailprice-Nettocorporation}{Retailprice}\times 100 \\ =\frac{\$32-\$29.20}{\$32}\times 100 \\ =\frac{\$2.80}{\$32}\times 100 \\ =8.75\% \end{gathered}$$

Computation of new spread

$$\begin{gathered} Newpricepershare=Publicprice-Decreasedvalue \\ =\$32-\$2.20 \\ =\$29.80 \end{gathered}$$

$$\begin{gathered} NewPercentagespread=\frac{Publicprice-Nettocorporation}{Publicprice}\times 100 \\ =\frac{\$32-\$29.80}{\$32}\times 100 \\ =\frac{\$2.20}{\$32}\times 100 \\ =6.875\% \end{gathered}$$

Computation of net amount

$$\begin{gathered} Percentagespread=\frac{Publicprice-Nettocorporation}{Publicprice} \\ 2.50\%=\frac{\$32-Nettocorporation}{\$32} \\ 2.50\%\times \$32=\$32-Nettocorporation \\ Nettocorporation=\$31.20 \\ Hence,theTrumpCompanyshouldreceive\$31.20. \end{gathered}$$