Question

In: Finance

Suppose, instead, that the investment banker agrees to underwrite the 10 million shares on a best-efforts basis.

Suppose, instead, that the investment banker agrees to underwrite the 10 million shares on a best-efforts basis. The investment banker is able to sell 8.4 million shares for $25.50 per share, and it charges XYZ Corp. $ 0.5 per share sold. $25.50 includes the commission.

a) How much money does XYZ Corp. receive?

b) What is the profit to the investment banker?

c) If the investment bank can sell the shares for only $24.75, how much money does XYZ Corp. receive?

d) What is the profit to the investment banker?

Solutions

Expert Solution

The values provided in the question are,

Total Shares of XYZ Corp = 10 million

Possiblity to Sell = 8.4 million Shares

Price of the Share = $25.50 per share (includes the commission)

Commission of Invesment banker = $0.5 per share

a) How much money does XYZ Corp. receive?

Total Sales Amount = no of shares sold * cost of the share

Total Sales Amount  = 8.4 * 25.50

Total Sales Amount  = 214.2 million

Commission of Investment banker = 8.4 * 0.5

Commission = 4.2 million

Recivable amount = = Total Sales amount - Commission of Investment banker

= 214.2 - 4.2

= 210 million

XYZ Corp. will receive $210 million

b) What is the profit to the investment banker?

Best Efforts Agreement: Under such an agreement, the underwriter does not guarantee the amount that they will raise for the issuing company. It only sells the securities on behalf of the company.

Based on this concept, Commission is the profit of the Investment Banker

Commission of Investment banker = 8.4 * 0.5

Commission = 4.2 million

Profit of the Investment Banker is $4.2 million

c) If the investment bank can sell the shares for only $24.75, how much money does XYZ Corp. receive?

Total Sales Amount = no of shares sold * cost of the share

Total Sales Amount  = 8.4 * 24.75

Total Sales Amount  = 207.9 million

Commission of Investment banker = 8.4 * 0.5

Commission = 4.2 million

Recivable amount = = Total Sales amount - Commission of Investment banker

= 207.9 - 4.2

= 203.7 million

XYZ Corp. will receive $203.7 million, If the investment bank can sell the shares for only $24.75

d) What is the profit to the investment banker?

Commission of Investment banker = 8.4 * 0.5

Commission = 4.2 million

Profit of the Investment Banker is $4.2 million

jeff jeffy answered 2 years ago
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