Bay City Axles and Transmissions, inc. has been a very successful business catering to the light duty trucking industry for the past 11 years. Financial records show that for every year, except the first year, the actual grow rate exceeded the sustainable growth rate by 10 to 15 per cent yearly. The company is now faced with the need to quickly raise $50 million dollars in order in business.
Old Dominion Bank and Bonds, Inc. a leading bank chartered in Hamilton, Ontario, is threatening Bay City Axles and Transmissions, that as a result of their defaulting on a $500 thousand payment o their secured $25 million long-term bond indenture, they probably will go to court to force bankruptcy proceedings.
Bay City Axles Transmissions financial vice-president Gloria Knumbers, assures the company they could easily be able to sell $50 million of new common stock, since their financial condition is basically good. Old Dominion Bank and Bonds has agreed that if Bay City Axles and Transmissions could raise $50 million by the sale of a new stock issue, they would suspend bankruptcy proceedings for 9 months. Bay City Axels and Transmissions investment banker indicates that such a sale of new stock will require a 7 per cent underpricing and an 8 per cent spread. Required:
Assuming the company's stock price does not change from the current price of $66 per share, how many shares must the company sell and at what price to the public.
How much money will the investment banker earn on the sale?
What is your advice to Bay City Axles and Transmissions?