The Norman Company needs to raise $50 million of new equity capital. Its common stock is currently selling for $50 per share. The investment bankers require an underwriting spread of 3 percent of the offering price. The company’s legal, accounting, and printing expenses, associated with the secondary offering, are estimated to be $750,000. How many new shares must the company sell to net $50 million?
Answer to relevant QuestionsWhat is a recapitalization? Why is this considered a pure capital structure change? Explain how Propositions I and II are different and how they are similar. How do stock prices generally react to announcements of firms’ changes in leverage? Why is this result perplexing and seemingly contradictory given your answer to Question 12-2? Suppose that a specialty retail firm takes out a term loan from a bank. Which do you think the bank would prefer to receive as collateral, a claim on the firm’s inventory or its receivables? What is a debenture? Why do you think that this is the most common form of corporate bond in the United States, but is much less commonly used elsewhere?
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