Secruity Brokers INC. specializes in underwriting new issues by small firms. On

Question

Secruity Brokers INC. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:

Price to public $5 per share
Number of shares 3 million
Proceeds to Beedles $14,000,000
The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the the issue were $300,000. What profit or loss would security brokers incur if the were sold to the public at the foloowing average price?

a. $5 per share
b. $6 per share
c. $4 per share

Explanation / Answer

a)
At $5 per share :

Sale proceeds = 3000000*5 = 15000000 ($) = 15 m$
Amount to Beedles = 14000000 ($) = 14 m$
Gross profit of security broker = 15 -14 = 1 m$
Expenses of security broker for the issue = 300000 ($) = 0.3 m$
Net profit of security broker = 1 - 0.3 = 0.7 m$ = 700000 ($) (ANSWER)

b)
At $6 per share :

Sale proceeds = 3000000*6 = 18000000 ($) = 18 m$
Amount to Beedles = 14000000 ($) = 14 m$
Gross profit of security broker = 18 -14 = 4 m$
Expenses of security broker for the issue = 300000 ($) = 0.3 m$
Net profit of security broker = 4 - 0.3 = 3.7 m$ = 3700000 ($) (ANSWER)

c)

At $4 per share :

Sale proceeds = 3000000*4 = 12000000 ($) = 12 m$
Amount to Beedles = 14000000 ($) = 14 m$
Gross profit of security broker = 12 -14 = -2 m$ ( it means loss of 2 m$)
Expenses of security broker for the issue = 300000 ($) = 0.3 m$
Net profit of security broker = - 2 - 0.3 = - 2.3 m$ = - 2300000 ($)

(means loss of 2300000 ($)) (ANSWER)

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