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Savatey [412]
3 years ago
10

A firm has negotiated a seasoned equity offer that will provide the firm with $1.68 million in net proceeds. The underwriting sp

read is 7.35 percent and the firm needs to sell 50,000 shares. What is the offer price
Business
1 answer:
Ivahew [28]3 years ago
4 0

Answer:

The correct answer is $36.27

Explanation:

Amount of net proceeds is $1,680,000. Number of shares to be issued is 5,000. Underwriters charge the spread at 7.35%.

Hence, 100% of the amount should cover $1,680,000 and the underwriter charges. Hence, the total amount required to be raised is more than $1,680,000.

Step 1: Calculate the amount to be raised.

Amount Needed = Amount to be raised by selling shares x (1 - Underwriters' Charge)

1,680,000 = Amount to be raised by selling shares x (1 – 0.0735)

1,680,000 = Amount to be raised by selling shares x 0.9265

Amount to be raised by selling shares = 1,680,000 / 0.9265

Amount to be raised by selling shares = 1,813,275.77

Step 2: Calculate the offer price.

Offer Price = Amount to be raised by selling Equity / Number of shares need to be sold

Offer Price = 1,813,275.77 / 50,000

Offer Price =$36.27

Therefore, the correct answer is $36.27

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Answer:

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b). Two ways in which fiscal policy can be used by Caribbean government to increase the level of employment and output in their economies are:

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2. Increasing government spending

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3. Fiscal contractionary policies, which are rarely used include reducing government spending and increasing taxes. This reduces the supply of money in the economy, thus causing a budget surplus. This if not controlled, causes deflation that reduces the levels of output and employment.

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Explanation:

a). Fiscal policy: fiscal policy ca be defined as the act by the government to use it's expenditure and taxation to control the economy. Government spending usually includes the purchase of goods while taxation is usually a compulsory charge by a government to finance their spending. As we can see, how much the government spends depends on the level of taxation. Fiscal policy are therefor rules and guidelines that utilize spending and taxation to manage the economy.

b). Most Caribbean countries on average are middle-income economies. Their economy largely relies on tourism, agriculture, oil and natural gas produce. With the upper middle-income Caribbean countries relying heavily on oil and natural gas export.  Most of the Caribbean countries are developing countries with economic characteristics like; high levels of unemployment and low levels of output. There are two ways in which fiscal policy can be used by Caribbean government to increase the level of employment and output in their economies. They are;

1. Reduction of business taxes. A reduction in business tax encourages investment in the economy. More investment in the company means more employment opportunities in the economy. Since tax cuts, increases disposable income by a considerable amount, this means that more income is available for production of goods and services. This causes an increase in output.

2. Increasing government spending: this can be done by offering grants to local and state governments to encourage spending on finished goods and services. By doing this, more businesses produce more since the demand is high. An increased demand requires high levels of output to satisfy the demand. Simultaneously, a larger work force is needed to meet the high levels of output required thus raises the level of employment.

c). A small open economy is an economy that takes part in international trade but due to the fact that it is small, their influence causes little or no considerable effect the international prices, rates of interest or even world income. Some of the reasons why fiscal measures cannot work in a small open economy in the Caribbean are;

1. Fiscal expansion by increasing government spending leads to the crowding out effect by the private sector.

2. Fiscal expansion can lead to increased levels of disposable income, increasing the demand for goods and services. This causes an increase in price leading to inflation.

3. Fiscal contractionary policies, which are rarely used include reducing government spending and increasing taxes. This reduces the supply of money in the economy, thus causing a budget surplus. This if not controlled, causes deflation that reduces the levels of output and employment.

d). The crowding out effect is caused by increased government spending in the public sector to the point that the private sector is driven down or in some instances are totally done away with.Crowding out effect can be avoided by offering investment subsidies. Thus the private sector can grow since the cost of investment is manageable.

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