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Problem 18-01 Profit or Loss on New Stock Issue Security Brokers Inc. specializes in underwriting new...

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 $370,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

$5.5 per share? Use minus sign to enter loss, if any.
$
$5.75 per share? Use minus sign to enter loss, if any.
$
$3.75 per share? Use minus sign to enter loss, if any.
$

Solutions

Expert Solution

a) Price to Public = $ 5.50

Number of Shares = 3 Million

Gross Proceeds to Security Brokers = Price to Public * Number of Shares

= 5.50 * 3,000,000

= $ 16,500,000

Expenses = $ 370,000

Net Proceeds = Gross Proceeds - Expenses

= 16,500,000 - 370,000

= $ 16,130,000

Proceeds to Beedles : $ 14,000,000

Profit to Security Brokers = Net Proceeds - Proceeds to Beedles

= 16,130,000 - 14,000,000

= $ 2,130,000

b) Price to Public = $ 5.75

Number of Shares = 3 Million

Gross Proceeds to Security Brokers = Price to Public * Number of Shares

= 5.75 * 3,000,000

= $ 17,250,000

Expenses = $ 370,000

Net Proceeds = Gross Proceeds - Expenses

= 17,250,000 - 370,000

= $ 16,880,000

Proceeds to Beedles : $ 14,000,000

Profit to Security Brokers = Net Proceeds - Proceeds to Beedles

= 16,880,000 - 14,000,000

= $ 2,880,000

c) Price to Public = $ 3.75

Number of Shares = 3 Million

Gross Proceeds to Security Brokers = Price to Public * Number of Shares

= 3.75 * 3,000,000

= $ 11,250,000

Expenses = $ 370,000

Net Proceeds = Gross Proceeds - Expenses

= 11,250,000 - 370,000

= $ 10,880,000

Proceeds to Beedles : $ 14,000,000

Loss to Security Brokers = Net Proceeds - Proceeds to Beedles

= 10,880,000 - 14,000,000

= $ -3,120,000

Hope I am able to solve your concern. If you are satisfied hit a thumbs up !!!

jeff jeffy answered 1 year ago

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