Security Brokers, Inc. specializes in underwriting new stock issues of small fir

Question

Security Brokers, Inc. specializes in underwriting new stock issues of small firms. On a recent offering of Barenbaum, Inc., the terms were:

                                                         Price to public                         $7.50 per share

                                                         Number of shares                     3 million

                                                Proceeds to Barenbaum                   $21,000,000

                     Security Brokers incurred $450,000 in out-of-pocket expenses in the design and distribution of the issue. What profit or loss would Security Brokers incur if the issue were sold to the public at an average price of (a) $7.50 per share, (b) $9.00 per share, and (c) $6.00 per share?

Explanation / Answer

Equation:

Profit or Loss = Average price x Number of shares - Proceeds to Barenbaum - Out of pocket expense

a.

Profit or Loss = 7.50 x 3,000,000 - 21,000,000 - 450,000 = $1,050,000

b.

Profit or Loss = 9 x 3,000,000 - 21,000,000 - 450,000 = $5,550,000

c.

Profit or Loss = 6 x 3,000,000 - 21,000,000 - 450,000 = -$3,450,000

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