Question 5. (15 points) Kern Corporation entered into an agreement with its inve
ID: 2790819 • Letter: Q
Question
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. 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:
Price per share= $24
Number of shares= 20,000,000
Gross Sales (A) = $480,000,000
Proceeds to Kern Corp.= $450,000,000
Out-of-pocket expenses $10,000,000
Expense Total (B)= $460,000,000
Net Profit (A-B)= $20,000,000
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?
Answer =
Price per share = $22
Number of shares= 20,000,000
Gross Sales (A) = $440,000,000
Proceeds to Kern Corp. =$450,000,000
Out-of-pocket expenses= $10,000,000
Expense Total (B) =$460,000,000
Net Loss (A-B)= ($20,000,000)
C)
Answer= It is a best effort deal between company and investment banker. Because the goal of the investment banker is to sell the stock at the offering price. A negotiated deal is riskier to the company because there is no guaranteed of payment to be received by the company, where as the best effort deal allows the company to receive a fixed amount.
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