Question 5. (15 points) Kern Corporation entered into an agreement with its inve

Question

Question 5. (15 points) Kern Corporation entered into an agreement with its investment banker to sell 10 million shares of the company's stock with Kern netting $225 million from the offering.    The expected price to the public was $25 per share.   The out-of-pocket expenses incurred by the investment banker were $5 million.

a. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $25 per share?

b.   What profit or loss would the investment banker realize if the issue were sold to the public at an average price of $20 per share?

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. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $25 per share?

Answer:

The amount raised by investment banker = 10*25= $250 million
Out of pocket expenses = $5 million
Profits to investment banker = $250-$5- $225 = 20 million

Therefore, Kern is obtaining profit of 20million.

b. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $20 per share?

Answer:

The amount raised by investment banker = 10*$20=$200 million
Out of pocket expenses = $5 million
Profits to investment banker = $200-$5-$225 = -$30 million

Therefore, Kern is obtaining loss of -30million.

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?

Answer:

This is a negotiated deal since the investment banker agrees to buy the entire issue at a set price, and then resells the stock at the offering price. Thus, the risk of selling the issue rests with the investment banker

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.