Please show work Question 5. (15 points) Kern Corporation entered into an agreem
ID: 2790914 • Letter: P
Question
Please show work
Question 5. (15 points) Kern Corporation entered into an agreement with its investment banker to sell 20 million shares of the company's stock with Kern netting $450 million from the offering. The expected price to the public was $24 per share.
The out-of-pocket expenses incurred by the investment banker were $10 million.
a. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $24 per share?
b. b. What profit or loss would the investment banker realize if the issue were sold to the public at an average price of $22 per share?
c. c. Is the agreement between the company and its investment banker an example of a negotiated or a best-efforts deal? Why? Which is riskier to the company? Why?
Explanation / Answer
a.
Total Earning of investment banker = ($24 × 20 million) - $450 million
= $480 - $450
= $30 million.
Total Earning of investment banker is $30 million.
Total cost = $10 million
Profit for investment banker = $30 - $10
= $20 million.
Profit for investment banker is $20 million.
b.
If sales price = $22 per share
Total Earning of investment banker = ($22 × 20 million) - $450 million
= $440 - $450
= -$10 million.
Total Earning of investment banker is -$10 million.
Total cost = $10 million
Profit for investment banker = -$10 - $10
= -$20 million.
Profit for investment banker is -$20 million that is investment banker incurred loss of $20 million.
c.
Agreement between the company and its investment banker an example of a best-efforts deal. on negotiated deal all issue related cost is paid by company and investment banker charge a fixed percentage of total issue.