When Sf Corp was private they wanted to sell 4,000,000 shares for $15. The hired Investment...

When Sf Corp was private they wanted to sell 4,000,000 shares for $15. The hired Investment banker told them to do the deal at $13,60 to ensure a successful sale. Does Sf have a dilemma? What are the advantages & disadvantages of following the bankers advice? Is there an agency problem here?

Expert Solution

Yes,. SF is in a dilemma since they expected to get a total capital of 60 Million (4,000,000 *15) and after the advice of the investment banker they can raise a total capital of only 54.4 million (4,000,000*13.6). So, they fall short of 5.6 Million

The advantages of the advice is that the company can sell all of its equity at $13.6 since for the investors, this will be more attractive then buying the shares at $15

The disadvantage is that they fall short of the capital they expected to raise through the public offering. In addition to this there will be advisory fee payable to the investment banker which will add further to costs.

Agency problem arises when the management wants to do something other than what the shareholders want them to do since the shareholders are the principals. Here, the shareholders are only potential shareholders and have still not become actual shareholders, there is no agency problem.

jeff jeffy answered 1 year ago

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