The Wrigley Corporation needs to raise $38 million. The investment banking firm of Tinkers, Evers, & Chance will handle the transaction.

The Wrigley Corporation needs to raise $38 million. The investment banking firm of Tinkers, Evers, & Chance will handle the transaction.

  

a.

If stock is utilized, 1,900,000 shares will be sold to the public at $21.00 per share. The corporation will receive a net price of $20.00 per share. What is the percentage underwriting spread per share? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

  
 

Underwriting spread per share

%

  

b.

If bonds are utilized, slightly over 38,000 bonds will be sold to the public at $1,010 per bond. The corporation will receive a net price of $996 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

  

Underwriting spread per bond

%

  

c-1.	Which alternative has the larger percentage of spread?
	Stock

  

c-2.	Is this the normal relationship between the two types of issues?
	Yes

rev: 03_06_2015_QC_CS-9798

 
Explanation:

a.

Underwriting spread	= ($21.00 − 20.00) / $21.00
	= .0476, or 4.76%
b.
Underwriting spread	= ($1,010 − 996) / $1,010
	= .0139, or 1.39%

  
c-1.

The stock alternative has the larger percentage spread.

c-2.

This is normal because there is more uncertainty in the market associated with a stock offering and investment bankers want to be appropriately compensated.