Question

A company goes public with an offering price of $17. There is a 7 percent underwriting spread. There is also a 15 percent overallotment option. The company is selling 25 million shares. The underwriter fills orders for 28.75 million shares but has not exercised the overallotment option. The stock drops to $20. How much would it cost the underwriter to cover the short position? Do not round intermediate calculations. Round your answer to the nearest dollar.

$   

If the underwriter used all its profits from the short position to purchase shares, how many shares would it purchase (include the shares that must be purchased to cover the short position)? Do not round intermediate calculations. Round your answer to the nearest whole number.

shares

Answer 1

Additional no. of shares over subscribed = 3.75 million (28.75- 25).

Stock rise to $20.

By using Overallotment option, he can buy 15% of 25 million = 3.75 million at offering price of $17.

Hence, for each stock he made 3$ profit. (20-17).

So total profit is, 3.75 million * 3 = $ 11.25 Million.

The additional shares, he need to buy at market price of $20.

11.25 Million/20= 562,500 shares.

Total No. of shares he purchase = 3.75 million + 562,500 = 4.3125 million shares or 4,312,500 shares.

(including 3.75 million shares that need to purchased to cover the short position).