Houston Investments (HI),a Texas-based investment banking firm,has proposed two types of payment plans for the IPO being considered by Anderson Exploration.The first is a firm commitment of $10,000,000.The second is a best efforts arrangement in which Houston Investments will receive $3.00 for every share sold up to a maximum of $1,200,000 for the 400,000 shares being offered.How much money will HI earn under the firm commitment method if it is able to sell only 90% of the offering at a price of $30.00 per share?

Question

Quizplus · Accepted Answer

Under the firm commitment method, HI has committed to purchasing the entire offering for $10,000,000. If they are only able to sell 90% of the offering at a price of $30.00 per share, they will sell 360,000 shares for a total of $10,800,000. However, since HI has already committed to purchasing the entire offering for $10,000,000, they will only earn the difference, which is $800,000. Therefore, the answer is A.

Houston Investments (HI),a Texas-Based Investment Banking Firm,has Proposed Two Types