Question 5. (15 points) An investment banker enters into a best efforts arrangem

Question

Question 5. (15 points) An investment banker enters into a best efforts arrangement to try and sell 8 million shares of stock at $20 per share for Kemp Corporation.   The investment banker incurs expenses of $2.5 million in floating the issue while the company incurs expenses of $1 million. The investment banker will receive 7 percent of the proceeds of the offering.

a. If the offering is successful and sells out at the expected price of $20, how much money will the company receive?

b. If the offering is successful and sells out at the expected price of $20, how much money will the investment banker receive?

c. If the offering is partially successful and 6 million shares are sold at a price of $15, how much does the company receive?

d Same facts as part c. How much does the investment banker receive?

e. Who bears more risk with a best efforts deal, the company or the investment banker? Why?  

Explanation / Answer

Proceeds = amount of issue(1-floatation cost)

               = (8*20 )(1-.07)

              = 160(1-.07)

              = 148.80

a)Company will receive a 148.80 million as net proceeds.

b)Investment banker will receive 11.20 [ 160-148.80] million as a commission.

c)proceeds =amount(1-floatation cost)

                 = (6*15)(1-.07)

                  = 90(.93)

                 = 83.70 million

company will receive 83.70 as net proceeds before issue expenses.

d)investment banker will recieve 6.30 million [ 90-83.70 ]

e)Investment banker bears a higher risk as investment banker assures that entire issue will be sold.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.