Finance Homework Help?

Question

ABC Inc., specializes in underwriting new ussues by small firms. On a recent offering of XYZ Inc., the terms were as follows:

Price to public: $7.50 per share
Number of shares: 3 million
Proceeds to XYZ: $21,000,000

ABC Inc incurred $450,000 in out of pocket expenses in the design and distrubution of the issue. What profit or loss would ABC Inc incur if the issue were sold to the public at an average price of:

a) $7.50 per share
b) $9.00 per share
c) $6.00 per share

I would appreciate any help you might be able to provide. Thanks.

Answer 1

If fixed proceeds of $21m to XYZ:

ABC profits = (Price per share x 3m shares) - ($21m) - ($450k)

a) ($7.50 x 3m) - $21m - $450k = $1.05m
b) ($9 x 3m) - $21m - $450k = $5.55m
c) ($6 x 3m) - $21m - $450k = $3.45m loss

If fees are a % of proceeds, then here's the answer:

Fee = [(Price x Shares) - Proceeds to XYZ]/(Price x Shares)

Fee = 6.666666667%

Profits = (Price x Shares * Fee) - $450k

a) $1.05m
b) $1.35m
c) $750k

The "real world" works like the second part because underwriters get a percentage, not a fixed amount.