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

Problem 18-01
Profit or Loss on New Stock Issue

Security 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 issue were $420,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

  1. $4.5 per share? Use minus sign to enter loss, if any.
    $ -------

  2. $6.75 per share? Use minus sign to enter loss, if any.
    $ ----------

  3. $4 per share? Use minus sign to enter loss, if any.            $ ............

Solutions

Expert Solution

Profit/Loss of Security Broker = (Price * Number of shares) - Proceeds to Beedles - Expenses incurred by Security Broker

a. Profit/Loss of Security Broker = ($4.5 * 3,000,000) - $14,000,000 - $420,000 = -$920,000

b. Profit/Loss of Security Broker = ($6.75 * 3,000,000) - $14,000,000 - $420,000 = $5,830,000

c. Profit/Loss of Security Broker = ($4 * 3,000,000) - $14,000,000 - $420,000 = -$2,420,000

jeff jeffy answered 2 years ago
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