An investment bank pays $32 per share for 3.0 thousand shares of CZS Company in

Question

An investment bank pays $32 per share for 3.0 thousand shares of CZS Company in a firm commitment stock offering. It then can sell those shares to the public for $35 per share. A. How much money does CZS receive? B. What is the profit to the investment bank? C. What is the listed stock price? D. Another investment bank offers to handle the stock issue on a best efforts basis. The investment bank is able to sell 2,700 shares for $39 per share, and it charges CZS $6 per share sold. How much money does CZS receive? E. What is the profit to the investment bank? F. What is the listed stock price? G. Would CZS prefer the firm commitment or the best efforts?

Explanation / Answer

Answer: A CZS receive= $32*3000shares=$96000

Answer:B Profit =($35-32)*3000=$9000

Answer:C Listed stock price =$10 per share

Answer:D The investment bank will agree to a best efforts approach because the company is perceived as a risky investment for a new issue. The investment bank will do its best to sell all of the new securities, but it does not guarantee it. The company bears the risk that the investment bank may fail to sell all of the new issue, thereby lessening the amount of money that the company receives.

Answer: CZS receive=(39-6)*3000=99000

Answer:E Profit = (39+6-35)*2700=27000

Answer: CZS would prefer the best effort.

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