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 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. 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.

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 1

Find the value of issue. Price per Share × Number of Shares $41.50 × 300,000 = $12,450,000 Example 1 Answer: Step 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: Step 2a

Find the total selling expenses. $809,250 + $112,050 = $921,300 Example 1 Answer: Step 2b

Find the net proceeds. Value of Issue – Total Selling Expenses $12,450,000 – $921,300 = $11,528,700 Example 1 Answer: Step 3

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

What is the cost per share for the Landover Company in Example 1? Example 2

Step: Find the cost per share. Total Selling Expenses ÷ Total Number of Shares $921,300 ÷ 300,000 = $3.071 Example 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 1

$21,873,000 Practice 1 Answer

Find the cost per share. Number of shares: 1,200,000 Total selling expenses: $1,487,000 Practice 2

$1,239 Practice 2 Answer