ABC Underwriters has agreed to a firm commitment underwriting in which they will pay you $20.75 million in exchanging for 2 million shares of stock for an IPO offering for your company. The offering price is expected to be $11 a share. If ABC can sell all of the shares, they will earn underwriting fee of ___________.

Question

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ABC Underwriters will earn a fee based on the difference between what they pay for the shares and what they sell them for. They pay $20.75 million for 2 million shares, which means they pay $10.375 per share. If they sell each share for $11, they make $0.625 per share. For 2 million shares, this amounts to $1.25 million ($0.625 * 2,000,000).

ABC Underwriters Has Agreed to a Firm Commitment Underwriting in Which