Accounting Case Study: Luba's Pharmaceuticals

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Register to read the introduction… In fact, it is a curse- hence, the name.

The next type of problem looks at flotation costs. The only trick here is to recognize that the spread is charged on all of the funds raised. Here is an example:

Luba’s Pharmaceuticals plans to raise $10 million via a general cash offer. Filing fees and legal expenses are $250,000. The underwriters have set the subscription price at $12.50 and charge a 7% spread on all funds raised. How many shares will the firm issue?

First, it should be clear that LP needs to raise $10.25 million. They need to pay the lawyers! The trickier part is the spread. You might be inclined to raise an extra 7% ($10.25M x 1.07 = $10,967,500), but that is INCORRECT. To see why, assume that LP raises $10.9675M. Then the underwriter takes 7% (7% of $10,967,500 = $767,725. LP gets the balance $10,967,500 - $767725 = 10,199,775- less than the $10,250,000 they need!
The RIGHT way to do it is: X(1-.07) = $10.25M X = $11,021,505.38 $11,021,505.38/$12.50 = 881,721 shares
…show more content…
US cents per lb. …show more content…
|86.75 |
|20 metric tons, C$ per metric ton; 10 cents = $2 per contract |
|LIFETIME | |DAILY | |
|High |Low |Month |
| |Intrinsic Value |Time Value |Intrinsic Value |Time Value |
|(a) |$0 |$3 |$5 |$4 |
|(b) |$0 |$3 |$4 |$5 |
|(c) |$3 |$0 |$4 |$5 |
|(d) |$3 |$0 |$5 |$4

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