Question

XYZ, Inc. has issued 10 million new shares of stock. An investment bank agrees to underwrite these shares on a best efforts basis. The investment bank is able to sell 8.4 million shares for $27 per share, and it charges XYZ $0.675 per share sold.

a. How much money does XYZ receive? (Enter your answer in dollars, not in millions. Do not round intermediate calculations.)
b. What is the profit to the investment bank? (Enter your answer in dollars, not in millions. Do not round intermediate calculations.)
c. What is the stock price of XYZ? (Enter your answer in dollars, not in millions.)

Answer 1

When the investment bank underwrites on a best effort basis, it is working on a commission model.

Therefore in this case the investment bank would get 8.4mn * 0.675 = USD 5,670,000

The company receives 8.4mn * 27 - 5670000 = USD 221,130,000

The stock price in this case would be USD 27 per share

When the investment bank underwrites on a firm commitment basis, it effectively buys the shares from the company at the rate of the commitment i.e. USD 27 in this case. If the Investment bank is not able to find buyers, it will be left with the unsold stock

Therefore in this case, the company receives USD 27 * 10mn - USD 27mn

The investment bank incurs a loss of of USD 1.5 per share = 27-25.5

Therefore the loss to the investment bank = USD 1.5 * 10mn = USD 1.5Mn

The stock price in this case would be USD 25.5 per share as that is the fair value public sees in that stock

Answer 2

a) Money received by XYZ $ 221,130,000 -8400000*(27-0.675) b) Profit $ 5,670,000 c) Stock price 27

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