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.

b. Why is the investment banker selling the stock at less than its current market price?

Short answer

The shares are sold at a price lower than its current market price due to the spread paid to the broker.

Step-by-step solution

Meaning of market price of shares

The market price of shares refers to the price at which the share is currently being traded in the stock market. This price is determined by the demand and supply mechanism of the market.

Explanation for selling the shares at a price lower than the current market price

The investment banker sells the shares at a lower price than the current market price due to spread. The spread is the commission paid to a broker for trading the shares on behalf of the company.