In 1999, Goldman Sachs Group and its partners, Sumitomo Bank Capital Markets Inc

Question

In 1999, Goldman Sachs Group and its partners, Sumitomo Bank Capital Markets Inc. and Kamehameha Activities Association, raised $3.6 billion through its initial public offering in the United States and Canada. Goldman Sachs & Co., Bear Stearns & Co. Inc., Credit Suisse First Boston Corporation, Lehman Brothers Inc., and J.P. Morgan Securities Inc. became some of the U.S. representatives of the deal by entering into an agreement to sell a certain number of shares to potential investors at a predetermined price Identify one of the underwriters in the IPO deal described above Kamehameha Activities Association Lehman Brothers Inc. The underwriter in the IPO process has several responsibilities True or False: The underwriter helps determine the preliminary offering price or the price range of the firm's stock True O False Assume that a stock-issuing firm has a choice between a private placement selling the shares for $36.00 per share or a best efforts offering that will sell all available shares at the prices described in the following probability distribution: Best efforts expected probability distribution Lowest quoted price Mid-range price Highest quoted price Probability 20% 30% 50% Selling price $32.00 $36.00 $42.00 Assuming that the issue is fully subscribed, or sold, which method would generate the most capital for the issuing firm? O Private placement O Best efforts sale

Explanation / Answer

Ans 1) Lehman Brothers Inc. was one of the underwriters in the IPO deal described above.

Ans 2) Its true that underwriter helps in determining the preliminary offering price and price range of the firm's stock.

Ans 3) Best efforts sale will generate higher capital in comparision to private palcement.

In case of best efforts sale price will be (.5*42 + .3*36 + .2*32) = $38.2 which is better than private palcement.

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