I need help with a finance question! 

The Presley Corporation is about to go public. It currently has affter
tax earnings of 7,500, and 2,5000 shares are owned by the present
stockholders. The new public issue will represent 600,000 new shares.
The new shares will be placed to the public at $20. per share, with a
5 percent spread on the offering prices. There will also be $2000,000
in out of pocket costs to the corporation. What is the net proceeds
for the Presley Corporation.

Could use answer tonight!

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Clarification of Question by baseball2-ga on 28 Apr 2005 20:13 PDT

I could really use some help on this if only to give me the formulas!
I need this by tomorrow night if at all possible. Thank you....

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Request for Question Clarification by omnivorous-ga on 29 Apr 2005 06:07 PDT

Baseball2 --

This appears relatively straightforward but there are some things that
need clarifying:

1.  "A 5 percent spread on the offering prices" sounds like a
difference between Bid-Ask prices.  However, in an IPO, it's more
likely that you mean "the underwriters received a 5% commission on
each share."  Which one is it?

2.  There's a typographical error in your out-of-pocket costs.  Are
they intended to be $200,000 or $2,000,000?

Best regards,

Omnivorous-GA

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Clarification of Question by baseball2-ga on 29 Apr 2005 16:01 PDT

You are correct in saying it is a 5 % commission


The amounts should be $200,000.


Thank you! Any help tonight would be greatful!

Baseball2 --

Thanks for the clarification.  Some of the data at the start of the
question is irrelevant (earnings and shares oustanding).  Commissions
clearly reduce proceeds to the company; so too do the out-of-pocket
expenses.  Plus, it's important to know that the out-of-pocket costs
are attached to the IPO - rather than being an expense that reduces
earnings.

The Initial Public Offering (IPO) will raise $20 x 600,000 shares = $12 million.

Commission = 0.05 * $12 million = $600,000
Out-of-pocket = $200,000

NET TO COMPANY = $12 million - $600,000 - $200,000 = $11.2 million

The expenses here are about 6.7% of the total, which is lower than the
industry norm of 10%-12%, according to Carter, Morse & Mathias.  The
investment banking firm has a very good definition of the expenses of
going public, noting "Out-of-pocket expenses include: underwriters
discount, legal, accounting and printing, which average 10-12% of
gross proceeds."

Carter, Morse & Mathias
"Initial Public Offerings," (Carter, undated)
http://www.cartermorse.com/articles/publicofferings.html

Best regards,

Omnivorous-GA

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Clarification of Answer by omnivorous-ga on 29 Apr 2005 16:55 PDT

Baseball2 --

Oh, and if you'd like to see more accounting references, here's a good
Google search strategy:
"IPO proceeds" accounting expenses

Best regards,

Omnivorous-GA