An investment banker agrees to underwrite an issue of 5 million shares of stock for NetChoice, Inc. on a best-efforts basis. The investment banker is able to sell 4.5 million shares for $31.00 per share and it charges NetChoice, Inc. $0.375 per share sold. What is the profit to the investment banker if it is able to sell 4.5 million shares for $31 per share?

Question

Quizplus · Accepted Answer

The investment banker was able to sell 4.5 million out of 5 million shares of stock.

Total revenue generated = 4.5 million shares * $31.00 per share = $139,500,000

Total cost to NetChoice, Inc. = 4.5 million shares * $0.375 per share = $1,687,500

Therefore, the profit to the investment banker = $139,500,000 - $1,687,500 = $137,812,500

Alternatively, another way to calculate profit is:

Total commission earned = 4.5 million shares * $31.00 per share * 7.5% commission = $9,472,500

Total cost to NetChoice, Inc. = 4.5 million shares * $0.375 per share = $1,687,500

Therefore, the profit to the investment banker = $9,472,500 - $1,687,500 = $7,785,000

Which is the same as $137,812,500 / 18 (the commission rate percentage as a decimal) = $7,785,000

An Investment Banker Agrees to Underwrite an Issue of 5