Question

In: Finance

An investment banker agrees to underwrite an issue of 10 million shares of stock for XYZ...

An investment banker agrees to underwrite an issue of 10 million shares of stock for XYZ Corp. on a firm commitment basis. The investment banker pays $25.50 per share to XYZ Corp. for the 20 million shares of stock. It then sells those shares to the public for $26.35 per share.

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 instead of $26.35, how much money does XYZ Corp. receive?

d)What is the profit to the investment banker?

Solutions

Expert Solution

Firm Underwritingrefers to a definite commitment by the underwriter or underwriters to take up a specified number of shares or debentures of a company irrespective of the number of shares or debentures subscribed for by the public. In such a case, the underwriters are committed to take up the agreed number of shares or debentures in addition to unsubscribed shares or debentures, if any. Even if the issue is over-subscribed, the underwriters are liable to take up the agreed number of shares of debentures.

a) XYZ Corp. Receives = 20 Million Shares × 25.50

= 510 Million

b) Profit to Investment Banker =( 26.35-25.50)× 20 Million Shares

=17 Million

c) If the shares are sold only for $24.75 then XYZ Corp will recieve the below amount

10 Million Shares underwritten × $25.50+ 10 Million Shares * $24.75

=502.5 Million

d) Profit to the investment banker

=(26.35-25.50)× 10 Million Shares

=$8.5 Million


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