Question

DRK, Inc., has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44
a. What is your best guess as to the total cost to DRK of the equity issue?. 
b. Is the entire cost of the underwriting a source of profit to the underwriters?

Answer 1

Answer:

A. $460,000

B. No

Explanation:

Given:

Number of share = 100,000

underwriter’s explicit fee = $60,000

Offer price = $40

New Price = $44

A.

The Total cost of Equity share = $[Number of equity share \times (New price - old price)] + explicit fees$

$= [100,000 \times (44-40)] + 60,000\\= [100,000 \times4] + 60,000\\= 400,000 + 60,000\\= 460,000$

B.

No. The brokers do not catch the portion of the costs relating to the price quoted.