Question: Otel Corporation entered into an agreement with its investment banker to sell 15 million shares of the company's stock with Otel netting $270 million dollars from the offering. The out-of-pocket expenses incurred by the investment banker were $5,000,000.
Q1. What profit or loss would the investment banker incur if the issue sold to the public at an average price of $25 per share?
Q2. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $15 per share?
Q3. Is this an example of a negotiated deal or best efforts? Why? Who bears the greater risk, the investment banker or the company? Why?
Q4. If the investment banker agrees to handle the issue on a best efforts basis, earning 7.5 percent of the proceeds, calculate the investment banker's profit or loss if all 15 million shares are sold at an average price of $15. How much will the company receive?
Q5. Who bears the greater risk in a best efforts deal, the investment banker or the company? Why?
Please show work for all problems.