Raising Funds How a business manages its finances is a key factor in whether or not that business succeeds. Where do businesses find the money to get started?

Raising Funds

How a business manages its finances is a key factor in whether or not that business succeeds.

Where do businesses find the money to get started?

Lesson Objective

Calculate the selling expenses and the net proceeds from an issue of stocks or bonds.

Content Vocabulary

stocksstocks

Share of ownership in a corporation.

stocks

Share of ownership in a corporation.bonds

underwriting commission

prospectus

bonds

A written pledge from a business or government that indicates the holder has lent the issuer money and will be repaid, with interest, after a certain amount of time.

bonds

A written pledge from a business or government that indicates the holder has lent the issuer money and will be repaid, with interest, after a certain amount of time.

underwriting commission

An amount of money paid to an investment banker who a business hires to distribute stocks or bonds.

underwriting commission

An amount of money paid to an investment banker who a business hires to distribute stocks or bonds.

prospectus

A formal written document that gives the facts about a new offering of securities.

prospectus

A formal written document that gives the facts about a new offering of securities.

The Landover Company is planning a major expansion program. To finance the program, Landover plans to sell an issue of 300,000 shares of stock at $41,50 per share. The underwriting commission will be 6.5 percent of the value of the stocks. Accounting fees, legal fees, and other expenses are estimated to be $112,050.

If all the shares of the stock are sold, what net proceeds will Landover Company receive?

Example 1Example 1

Find the value of issue.

Price per Share × Number of Shares

$41.50 × 300,000 = $12,450,000

Example 1 Answer: Example 1 Answer: Step 1Step 1

Find the underwriting commission.

Value of Issue × Percent of Underwriting Commission

Underwriting commission:

$12,450,000 × 6.5% = $809,250

Other expenses: = $112,050

Example 1 Answer: Example 1 Answer: Step 2aStep 2a

Find the total selling expenses.

$809,250 + $112,050 = $921,300

Example 1 Answer: Example 1 Answer: Step 2bStep 2b

Find the net proceeds.

Value of Issue – Total Selling Expenses

$12,450,000 – $921,300 = $11,528,700

Example 1 Answer: Example 1 Answer: Step 3Step 3

FormulaFormula

Cost per Share = Total Selling Expenses ÷ Total Number of Shares

What is the cost per share for the Landover Company in Example 1?

Example 2Example 2

Step: Find the cost per share.

Total Selling Expenses ÷ Total Number of Shares

$921,300 ÷ 300,000 = $3.071

Example 2 AnswerExample 2 Answer

Find the net proceeds.

Value of stock: $23,000,000

Commission: 4.5% of the value of the stock

Other selling expenses: 0.4% of the value of the stock

Practice 1Practice 1

$21,873,000

Practice 1 AnswerPractice 1 Answer

Find the cost per share.

Number of shares: 1,200,000

Total selling expenses: $1,487,000

Practice 2Practice 2

$1,239

Practice 2 AnswerPractice 2 Answer