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Profit or Loss on New Stock Issue Security Brokers Inc. specializes in underwriting new issues by...

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 $500,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

  1. $5.25 per share? Use minus sign to enter loss, if any.
    $
  2. $6.25 per share? Use minus sign to enter loss, if any.
    $
  3. $4 per share? Use minus sign to enter loss, if any.
    $

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Expert Solution

(a)

Average price per share received by underwriters= 5.25

Total number of shares= 3000000

Total proceeds to underwriter = 5.25*3000000= $15750000

proceeds to beedles =$14000000

Out of pocket expenses= $500000

Profit or loss on Underwriting = Total proceeds to underwriters - proceeds to beedles - out of pocket expenses

15750000-14000000-500000

$1250000

So, security brokers will incur profit of $1,250,000

(b)

Average price per share received by underwriters= 6.25

Total number of shares= 3000000

Total proceeds to underwriter = 5.25*3000000= $18750000

proceeds to beedles =$14000000

Out of pocket expenses=$ 500000

Profit or loss on Underwriting = Total proceeds to underwriters - proceeds to beedles - out of pocket expenses

18750000-14000000-500000

$4250000

So, security brokers will incur profit of $4,250,000

(c)

Average price per share received by underwriters= 4

Total number of shares= 3000000

Total proceeds to underwriter = 5.25*3000000= $12000000

proceeds to beedles =$14000000

Out of pocket expenses= $500000

Profit or loss on Underwriting = Total proceeds to underwriters - proceeds to beedles - out of pocket expenses

12000000-14000000-500000

-2500000

So, security brokers will incur loss of -$2500,000

Please thumbs up.

jeff jeffy answered 1 year ago
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