Underwriting and flotation expenses


Question 1. Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:

Price to Public             $5 per share
Number of shares        3 million
Proceeds to Beedles    $14,000,000

The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss would security Brokers incur if the issue were sold to the publics at the following average price?

a. $5 per share
b. $6 per share
c. $4 per share

Question 2. The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock.  Underwriters have informed the firm’s  management that they must price the new issue to the public at $22 per share because of signaling effects. The underwriters’ compensation will be 5% of the issue price, so Beranek will net $20.90 per share.  The firm will also incur expenses in the amount of $150,000.  How many shares must the firm sell to net $20 million after underwriting and flotation expenses?

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Accounting Basics: Underwriting and flotation expenses
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