When a firm needs to raise funds in the financial markets, it usually uses the s

Question

When a firm needs to raise funds in the financial markets, it usually uses the services of an investment banker. First, it must make some initial decisions regarding how much capital it needs, what kind of securities to issue, and whether to accept competitive bids or negotiate a price privately. Then it is time for the firm to select an underwriter and begin the issuing process. However, the competitive bid agreements between underwriters and issuing firms can take a couple of different forms. In some cases, an investment bank agrees to arrange the sale of the issuing firm's securities and does its best to sell all shares but makes no guarantees to that effect. This is an example of: An underwritten arrangement A best efforts arrangement In the event that an issuer elects to use a best efforts arrangement, who bears all the risk that the stock issue might be undersubscribed? In other words, who is at risk if the investment bank cannot sell all shares to investors at the time of issue? The difference between the price at which an investment banking firm buys shares from an issuing company and the price at which those securities are sold in the primary market is called the: Bid price Underwriter's spread Asked price Offer price Flotation cost

Explanation / Answer

7.1. When the underwriter agrees to arrange the sale of issuing firm's security and does its best to sell all the shares but does not take the guarantee to sell all shares is an example of " A best efforts arrangement".

2. In the case of a best efforts arrangement , "the Issuing Firm " is at risk if the investment bank cannot sale all the shares to the investors.

3.The difference between the price at which the investment bank buys shares from issuing company and the price at which it offers the shares to be sold in the primary market is called the "Underwriter's spread".

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