Please answer question 3 part b (i & ii) 3. Spartans Investment House is an unde
ID: 2401877 • Letter: P
Question
Please answer question 3 part b (i & ii) 3. Spartans Investment House is an underwriting firm specializing in initial public offerings (IPOs). Spartans is hired to underwrite an issue of 7.5 million shares of stock for MyFace, a private social media firm looking to go public a. Spartans agrees to underwrite the stock on a firm commitment basis, paying $8.75 per share for 7.5 million shares. i. If the IPO price is S9.50, how much capital does MyFace raise? How much profit (or loss) does Spartans earn? (2 points) ii. If the IPO price is S7.95, how much capital does MyFace raise? How much profit (or loss) does Spartans earn? (2 points) b. Spartans agrees to underwrite the stock on a best efforts basis. The underwriter is able to sell 6.8 million shares charges a commission of S0.257 per share. i. If the underwriter is able to sell the stock at $9.50 per share, how much capital does MyFace raise? How much profit (or loss) does Spartans earn? (2 points) ii. If the underwriter is able to sell the stock at $7.95 per share, how much capital does MyFace raise? How much profit (or loss) does Spartans earn? (2 points) c. Which party (Firm or Underwriter) bears the price risk in a t? Which party bears the price risk in a Firm Commitment Best Efforts? Explain. (2 points)
Explanation / Answer
Question 3 (b)
In a best effort underwritting agreement , the underwritter agrees to place as much of an offering with investors as possible, but is not responsible for any portion of issue/offering it fails to sell.
(i) MyFace Inc raised capital through its IPO . = 6,800,000 X $9.50 per share = $64,600,000
Profit made by Spartens in this IPO = 6,800,000 X $0.257 per share = $1,747,6000
(ii) MyFace Inc raised Capital through its IPO . = 6,800,000 X $7.95 per share = $54,060,000
Profit made by Spartens in this IPO = 6,800,000 X $0.257 per share = $1,747,6000
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