An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corp.
a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $12.50 per share to Looney Landscaping Corp. for the 15 million shares of stock. The investment bank then sells those shares to the public for $13.25 per share. How much money does Looney Landscaping Corp. receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $11.95, how much money does Looney Landscaping Corp. receive? What is the profit to the investment bank?
b. Suppose, instead, that the investment bank agrees to underwrite the 15 million shares on a best efforts basis. The investment bank is able to sell 13.6 million shares for $12.50 per share, and it charges Looney Landscaping Corp. $0.275 per share sold. How much money does Looney Landscaping Corp. receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $11.95, how much money does Looney Landscaping Corp. receive? What is the profit to the investment bank?