Question

An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share. If the investment bank can sell the shares for $9.75 per share, what is the profit (loss) to the investment banker?

Answer 1

= -$7,500,000 (the investment bank makes a loss of $7,500,000)

Step-by-step explanation:

Step 1: Determine the profit or loss of the investment bank if it sells the shares for $11.2 per share

Agreed amount to pay to TWResearch =

$10.5 x 10,000,000= $105,000,000

Investment bank' profit = (11.2- 10.5) x 10 000 000 = $7,000,000

Step 2: However, since the investment bank can only sell the shares for $9.75, then the calculations will be as follows:

a) Agreed amount to pay to TWResearch =

$10.5 x 10,000,000= $105,000,000

b) Based on a selling price of $9.75

The profit or loss to the investment bank = the amount it sold the shares - the amount it bought the shares from the firm.

= ($9.75- $10.5) x 10 000 000

= 0.75 x 10000000

= -$7,500,000 (the investment bank makes a loss of $7,500,000)

Answer 2

$ 7.5 million

Step-by-step explanation:

The investment bank will have a loss which = ( 9.75 - 10.50 ) × 10 million = $ - 7.5 million