11. Darby Minerals wants to hire an investment banker to sell 2 million shares o
ID: 2777273 • Letter: 1
Question
11. Darby Minerals wants to hire an investment banker to sell 2 million shares of stock to the public. Darby is considering using either a firm commitment or a best efforts offering.
a) If Darby goes with a firm commitment, the offer price will be $15.00 per share and the spread will be 25 cents a share and all 2 million shares will be sold. The actual sale price to the public is $14.55.
b) Suppose that Darby uses a best efforts offering. The actual sale price to the public is again $14.55 and the investment banker charges 4 cents per share sold as commission. Assume that in the best efforts offer only 1.85 million shares can be sold.
What are the proceeds to Darby from the sale of stock in the firm commitment and the best efforts and what is the investment banker's gain or loss in each case? Ignore any other costs and expenses.
12. Why are mutual funds popular with individual investors?
Explanation / Answer
Dear coleague,
1) The Proceeds from sale of stock in the firm commitment to Darby will be $ 14.55 * 2 million = $ 2.91 billion
And in the investment banker's commission will be 2 million share multiply by 25 cents commission per share i.e. 2,000,000 * 0.25 = $ 500,000 commision
The Proceeds from sale of stock will remain the same for Darby will be No. of shares sold multiply by Sale price per share i.e. 1,850,000 * $ 14.55= $ 26,917,500
The commission for investment banker in this case will be 1,850,000 * $ 0.04 = $ 74,000
2) Mutual funds are popular amoug individual investors for a variety of reasons.
Firstly Mutual funds are managed by professional fund managers who have years and decades of experience in the market. Thus there is a high probablity that the fund manager will be able to make better returns than most investors in the market.
Secondly Mutual Funds create a pool of wealth to invest in different stock with a small amount. So lets say 100 small investors come together, pool their money and hire a fund manager and thats what a mutual fund is. Thus is gives advantage of scale of investment as well as diversification even by investing small amount of money individually.
Thirdly Mutual Funds reduce the risk. There is a lot of restriction with regards to the allocation amount for investing in a particular asset class or industry or company. Thus it reduces the risk taken on a particular company or asset class or industry and enables long term wealth creation of the portfolio.
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