Question

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

a. How many shares of stock must be sold to net $21,120,000? (Note: No out-of-pocket costs must be considered in this problem.)

Short answer

The company should sell 500,000 shares to get $21,120,000.

Step-by-step solution

Information provided in the question

Net income = $19,000,000

Shares outstanding = $4,000,000

Present selling price = $48 per share

ROI =13 %

Selling price for public issue = $44 per share

Spread = 4%

Calculation of the number of shares to be sold

The company should sell 500,000 shares.

$\begin{array}{rcl}\mathrm{Number}\mathrm{of}\mathrm{shares}& =& \frac{\mathrm{Net}\mathrm{amount}\mathrm{required}}{\mathrm{Share}\mathrm{price}\times \left(1-\mathrm{Flotation}\mathrm{cost}\right)}\\ & =& \frac{\$21,120,000}{\$44\times \left(1-4\%\right)}\\ & =& 500,000\mathrm{shares}\end{array}$