An investment banker agrees to a firm commitment offering of two million shares of Ace stock. The offer price is set at $55 and the spread is 50 cents per share. If the stock is actually sold to the public at $53.80,however,what is the investment banker's gain or loss?

Question

Quizplus · Accepted Answer

The investment banker agreed to the firm commitment offering of two million shares of Ace stock at a set price of $55 per share with a spread of 50 cents per share. This means that the investment banker expected to make a profit of $0.50 per share, or a total profit of $1 million ($0.50 x 2 million shares) from the offering. 
However, if the stock is actually sold to the public at $53.80, the investment banker will suffer a loss of $1.20 per share ($55 - $53.80) or a total loss of $2.4 million ($1.20 x 2 million shares). 
Therefore, the investment banker's gain or loss is -$2.4 million or $2,400,000 loss. The correct answer is B.

An Investment Banker Agrees to a Firm Commitment Offering of Two