Question

Becker Brothers is the managing underwriter for a 1.80-million-share issue by Jay’s Hamburger Heaven. Becker Brothers is "handling" 12 percent of the issue. Its price is $20 per share, and the price to the public is $21.50. Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of $21.00. It later sells the shares at an average value of $20.70. Compute Becker Brothers’ overall gain or loss from managing the issue. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Answer 1

Becker Brothers gained $324,000 from the underwriting spread of managing a stock issue and lost $15,000 during market stabilization activities, resulting in an overall gain of $309,000.

Step-by-step explanation:

To calculate the overall gain or loss from managing the stock issue for Jay's Hamburger Heaven, Becker Brothers' activities need to be analyzed in two parts: earnings from the underwriting spread and the impact of market stabilization.

Underwriting Spread Calculation:

Becker Brothers is handling 12% of a 1.80-million-share issue at an underwriting price of $20 per share and a public price of $21.50 per share. The underwriting spread per share is the difference between these two values, which is $1.50 ($21.50 - $20.00).

12% of 1.80 million shares is 216,000 shares (1.80 million * 0.12). The total underwriting spread is 216,000 shares * $1.50 per share, equaling $324,000.

Market Stabilization Activities:

During market stabilization, Becker Brothers purchased 50,000 shares at an average price of $21.00 and sold them at $20.70. The loss per share from stabilization is $0.30 per share ($21.00 - $20.70).

The total loss from stabilization is 50,000 shares * $0.30 per share, which equals a loss of $15,000.

To calculate the overall gain or loss, subtract the loss from stabilization from the underwriting spread earnings: $324,000 - $15,000, resulting in an overall gain of $309,000.