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 sell 2 million shares at $55 per share, with a spread of 50 cents per share. Therefore, the total amount of money expected from this offering is:
2,000,000 shares x $55 per share = $110,000,000
The spread is 50 cents per share, so the investment banker would receive:
2,000,000 shares x 0.50 cents per share = $1,000,000
Thus, the investment banker's total revenue is $110,000,000 + $1,000,000 = $111,000,000.
However, the stock only sold for $53.80 per share, so the total proceeds from the offering are:
2,000,000 shares x $53.80 per share = $107,600,000
Thus, the investment banker's loss is $111,000,000 - $107,600,000 = $3,400,000, which is answer choice B.

An Investment Banker Agrees to a Firm Commitment Offering of Two