cate of investment bankers has agreed to underwrite ration\'s common stock at a
ID: 2784509 • Letter: C
Question
cate of investment bankers has agreed to underwrite ration's common stock at a price of $38 a share and to reoffer it to the public at $41 ers agree that the 30 cents a share for its v. A syndi Among themselves, a share. originating house will be allowed work in preparing the issue for the zarket and for managin the syndicate and selling group, that 70 cents a share wil the compensation for the underwriting risk, and that the sharto the selected dealers'of the selling group will be $2 a share. A) Leaving out of consideration flotation expenses chargeable to the issuing corporation, what total payment would it receive fron the bankers if they succeeded in selling al1 shares at $41 each? If they had to cut the public offering price, to $40 to sell all shares? If they had to drastically cut this price to $36 to unload the full issue? B) Assuming a successful sale of all shares of $41, originating house if it underwrote 6o,000 shares and customers? What would be the total 30,000 shares and took down 16,000 shares for its what would be the total compensation earned by the took down 25, 000 shares for retail sales to its own earned by another underwriting firm if it underwrot compensation own retailing selling?Explanation / Answer
Answer - For this we question we need to understand the concept of Underwriting spread which is defined as "The difference in price between the public offering price and the price and underwriter pays to the issuing coporation. The difference represents the profit avaiable to the syndicate or selling group".
A) Assuming all the shares are sold at $41 then the total payment received will be
= 400,000 * ($41-30 cents)
= 400,000 * $40.70 = $16,280,000
Assuming all the shares are sold at $40 then the total payment received will be
= 400,000 * ($40-30 cents)
= 400,000 * $39.70 = $15,880,000
Assuming all the shares are sold at $36 then the total payment received will be
= 400,000 * ($36-30 cents)
= 400,000 * $35.70 = $14,280,000
b) Assuming a sucessful sale of all the shares of $41 with underwriting of 60000 shares and 25000 shares for retail customer then compensation would be
Amount from Sale of shares = 375,000 * 41 + 25000 * 39
= $15,375,000 + $975,000 = $16,350,000, This compensation will reduce by Banker commission and underwriter commission
Commission = 400,000 * 0.30 + 85000 * 0.70 = 179,500
So net compensation will be = $16,350,000 - $179,500 =$16,170,500
The another underwriting firm would have earned
30000 * 0.70 + 16000 * 2.70 = $64,200
Assuming underwriting firm sells the share to its customer at full price and keeps $2 with themselves
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