1. 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.
2. Why are mutual funds popular with individual investors?