Firm commitment versus best efforts. Astro Investment Bank offers Lunar Vacation

Question

Firm commitment versus best efforts. Astro Investment Bank offers Lunar Vacations the following options on its initial public sale of equity: (a) a best efforts arrangement whereby Astro will keep 2.6% of the retail sales or (b) a firm commitment arrangement of $10,400,000. Lunar plans on offering 1,000,000 shares at $12.87 per share to the public. If it sells 100% of the shares, which is the better choice for Lunar Vacations? Which is the better choice for Astro Investment Bank?

a. Under the best efforts arrangement, what are the proceeds for Lunar Vacations?

b. Under the firm commitment arrangement, what are the proceeds for Lunar Vacations?

c. The best choice for Lunar Vacations is the _________________ arrangement. (best efforts or firm commitment)

d. Under the best efforts arrangement, what are the proceeds for Astro Investment Bank?

e. Under the firm commitment arrangement, what are the proceeds for Astro Investment Bank?

f. The best choice for Astro Investment Bank is the ____________________ arrangement. (best efforts or firm commitment)

Explanation / Answer

Proceeds to Lunar

a)

Best effort = 100%*1000000*12.87*(1-2.6%) = 12535380

b)

Commitment arrangement = 10400000

c)

Best effort it better for Lunar

Proceeds to Astro

d)

Best effort = 100%*1000000*12.87*2.6% = 334620

e)

Commitment arrangement = 1000000*12.87 - 10400000 = 2470000

f)

Commitment arrangement is better for Astro

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