Great Plains Investment Inc.(GPI),an investment banking firm,has proposed two types of payment plans for the IPO being considered by Ashford Community Hospital.The first is a firm commitment of $5,000,000.The second is a best efforts arrangement in which GPI will receive $4.00 for every share sold up to a maximum of $2,000,000 for the 500,000 shares being offered.How much money will GPI earn under the best efforts method if it is able to sell only 80% of the offering at a price of $30.00 per share?

Question

Quizplus · Accepted Answer

With the best efforts arrangement, GPI will receive $4.00 for each share sold up to a maximum of $2,000,000. If the offering is for 500,000 shares, then the maximum amount GPI can earn is 500,000 x $4.00 = $2,000,000.

If GPI is only able to sell 80% of the offering, this means they will sell 500,000 x 0.8 = 400,000 shares.

At a price of $30.00 per share, the total amount raised from the IPO would be 400,000 x $30.00 = $12,000,000.

GPI's earnings would be 400,000 x $4.00 = $1,600,000, since they only receive $4.00 per share sold.

Therefore, the best choice is C, $1,600,000.