Question

An investment bank (IB) agrees to place 5 million new IPO

                 shares for BankMed on a best effort basis, with a retainer

                 fee of $1 million and a success fee of $1.25 per share sold

           a) If the IB was able to sell 4,200,000 IPO shares for $54

                 a share , what are the total revenues of the IB and how much   

                 does BankMed receives?   

           b) Would BankMed be better off with a fully underwritten offer

                from the IB of $225 million for the 5 million shares issued?

          c) At what price per share should the IB sell the fully underwritten

                5 million shares to the public for the IB to make the same

                revenues as in part (a) ?

Answer 1

a) Total Success fee on selling 4.2 million shares = 4.2 million * $1.25 = $5.25 million

Retainer fee = $1 million

So, total fee/ Revenues to IB = $5.25 million + $ 1 million = %=$6.25 million

(Please note that in some cases, Retainer fee is offset by Success fee and in that case, total Revenues will be only $5.25 million)

Total Received by BankMed = 4.2 million * $54 - $6.25 million = $220.55 million

b) In case of fully underwritten offer,

Amount received by BankMed = $225 million which is more than received by BankMed in case a)

Hence, BankMed be better off with a fully underwritten offer

c) To make $6.25 million profit

Selling price of 5 million shares = $225 million + $6.25 million = $231.25 million

Hence price per share = $231.25/5 = $46.25 / share